For years the main risks in owning or trading cryptocurrencies were that your crypto exchange would be hacked or that you would simply lose track of the keys you need to access your tokens. Then crypto winter set in. Crypto values plummeted and have yet to make a significant recovery. As token prices fell, crypto businesses that bet everything on crypto always going up went bankrupt. Then we discovered that many in the crypto center were committing fraud in attempts to stay afloat. And many crypto exchanges are still not paying close enough attention to who is transferring money via their services. Now the Biden Administration is looking at the next set of crypto risks.
Preventing a Crypto Collapse from Spreading
The risks that the Administration and regulators are concerned about over the coming years are those for investors in the crypto realm and the broader financial community as it might be affected by a more severe crypto crash. The relatively smaller size of all crypto assets compared to other financial assets makes this less of an immediate risk but still a significant risk over the longer term if it is not properly addressed.
How Does Crypto Compare to Other Financial Assets?
In March of 2023 the total value of all crypto tokens is about 1 trillion US dollars. This is down from roughly $3 Trillion at the crypto November 2021 peak. By comparison, the total market value of stocks on the New York and Nasdaq Stock Exchanges is $39 Trillion which is down by about 12% from its high at the end of 2021. All US commercial real estate is worth somewhere between $14 Trillion and $17 Trillion and all US farmland comes to just under $3 Trillion. Total US bank deposits at the beginning of 2023 came to about $17.7 Trillion.
How Could Crypto Problems Hurt the Rest of the Financial System?
As noted by the current Administration, there have been crypto entities that routinely ignore the sort of basic controls for risk common to all businesses. These companies often disregard financial regulations pertinent to their business sectors as well. Conflict of interest is common in the crypto realm and crypto promoters all-to-often mislead consumers. From simple failure to disclose financial issues in a company to outright fraud, those seeking to profit in the crypto world are dishonest with their clients. And cyber security is poor in the crypto world as shown by North Korea’s success in hacking as much as $1 billion in crypto which went into their missile program.
So, how does any of this affect the rest of the financial world? The Financial Crisis was triggered by a collapse of the housing sector caused by subprime mortgages. The stock market was not all that shaky but it lost 40% of its value in just four months as housing prices collapsed and credit dried up. Some stocks, like banks, were directly affected by the housing market collapse and others simply went down as the market panicked for as investors were forced to sell good investments in order to cover debts incurred by bad investments. In the case of crypto, Bitcoin tracks up and down with the Nasdaq and one can assume that many investors hold both. Thus we would expect someone who lost in the Bitcoin market or Nasdaq to have to sell in the other market which would end up driving down prices in both markets.
Banks have become interested in ways to profit as decentralized finance grows as a business sector. One of the specific concerns of regulators is that a total crypto collapse does not pull the banking system down again like it did in the Financial Collapse. Although many crypto businesses may complain about coming regulations, consumers will be better protected from more crypto collapses and personal financial losses.
Next Set of Crypto Risks – SlideShare Version