Cryptocurrency Industry Poses a Threat to Financial Stability – Basel Committee

International banking authority The Basel Committee on Banking Supervision issued a warning to banks and financial comoanies against the risks related to digital assets.

Hosted by Swiss-based Bank for International Settlements, the Basel Committee expressed critical view towards cryptocurrencies and emphasised that they are not accepted as legal tenders in any country in the world and cannot reliably perform functions of money.

“While crypto-assets are at times referred to as “crypto-currencies”, the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value.”  

The Committee is concerned that the growing industry of cryptocurrency trading may threaten the financial stability and increase risks for banking sector. The Swiss-based think tank provided a long list of risks including liquidity risk; credit risk; market risk; operational risk and reputation risks to name just a few.

Even though the nascent industry is still small relative to the size of global financial system, banks should be very cautious when providing services to crypto-related businesses. Also the involvement in this segment requires relevant and requisite technical expertise and a robust risk management system.

“The Committee continues to monitor developments in crypto-assets, including banks’ direct and indirect exposures to such assets. The Committee will in due course clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto-assets. It is coordinating its work with other global standard setting bodies and the Financial Stability Board.” the Committee concluded.