Systemic Risk From Crypto Assets Is Rising, Says RBI Report
Crypto assets are being increasingly seen as a potential source of risk for the financial sector, the report said.
The perception of crypto assets as a possible risk for the financial system has risen in the year gone by, according to a Reserve Bank of India.
Growing risks from private cryptocurrencies were flagged among the major contributors to a rise in global, financial market, and general risks in RBI's systemic risk survey, the RBI said in its Financial Stability Report released on Dec. 29.
Crypto assets also exhibit high correlations with equities, and even though they are claimed to be inflation hedges, their values have fallen even as inflation has risen, it said.
"Leverage is a constant theme across the crypto ecosystem, making failures rapid and losses huge and sudden," the report said.
It highlighted the collapse of the crypto exchange FTX, hedge fund Three Arrows Capital, and stablecoin TerraLuna among examples of interconnected weaknesses in the sector.
To address future financial stability risks and to protect consumers and investors, it is important to arrive at a common, global approach to regulating crypto assets, the report said.
Among the routes highlighted for regulating crypto in the report is allowing it to basically implode. While this could make the sector irrelevant, it could also have a downside if crypto continues to integrate with the mainstream financial system, it said.
While crypto assets remain volatile, they haven't yet had a spillover on the stability of the formal financial system. But a growing body of experience suggests that the sector is unstable, increasingly interconnected and concentrated, the report highlighted.