While the role of retail investors has received much attention, we know less about the role of financial intermediaries in this sector.
Focus
The market capitalisations of cryptocurrencies
and related economic activities have grown phenomenally in recent
years.
How significant is the presence of traditional intermediaries such as
banks and investment funds in crypto markets, and what motivates them to
take on cryptocurrency exposures? And how important are novel
intermediaries such as crypto exchanges?
Contribution
We gauge the significance of financial intermediaries in crypto
markets, using a novel global supervisory database of banks'
cryptocurrency exposures and a range of additional data sources. We
assess the factors that determine banks' holdings of cryptocurrencies.
In addition, we investigate the role played by novel crypto exchanges,
and examine the cross-country drivers of institutionalisation.
Findings
The potential for cryptocurrencies to scale up quickly calls for a
comprehensive approach to assessing and mitigating risks, even though
the interlinkages between crypto markets and mainstream finance have
remained limited. The exposures of major banks to cryptocurrency
exposures are currently still very modest, amounting to less than USD
200 million in 2020. We find that banks are more likely to hold
cryptocurrencies when country indicators for greater innovation
capacity, more advanced economic development, and financial inclusion
are high. We also show that substantial activity is concentrated in
lightly regulated crypto exchanges. This "shadow crypto financial
system" serves both retail and institutional clients, such as dedicated
investment funds.
Abstract
The phenomenal growth of cryptocurrencies raises important questions
about their footprint on the financial system. What role are traditional
financial intermediaries playing in cryptocurrency markets and what
drives their engagement? Are new nodes emerging? We help answer these
questions by leveraging a novel global supervisory database of banks'
cryptocurrency exposures and by synthesising a range of complementary
data sources for other types of institutions. We find that major banks'
exposures currently remain at very modest levels. Across countries,
higher innovation capacity, more advanced economic development, and
greater financial inclusion are associated with a higher likelihood of
banks taking on cryptocurrency exposures. We show that substantial
activity is concentrated in lightly regulated crypto exchanges. This
"shadow crypto financial system" serves both retail and institutional
clients, such as dedicated investment funds. An uneven regulatory
treatment across banks and crypto exchanges and significant data gaps
suggest that a proactive, holistic and forward-looking approach to
regulating and overseeing cryptocurrency markets is needed. It should
focus on ensuring a more level playing field with regard to financial
services provided by established financial institutions and
intermediaries in the emerging crypto shadow financial system by
introducing more stringent regulatory and supervisory oversight for the
latter.
BIS
© BIS - Bank for International Settlements
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article