The Wide Angle – modest interconnectedness with cryptocurrencies but banks not immune to crypto risk
Rapid growth and extreme price gyrations in cyber markets have not yet impacted financial markets or banks. But crypto regulation is sub-standard and banks are not immune to crypto risk as client demand increases.
Sam Theodore, Senior Consultant, Scope Group
Even though crypto trading volumes have rapidly risen in volume – from USD 16bn five years ago to around USD 2.6trn – the market is equivalent to little more than 1% of the USD 250trn global financial system and has a far narrower investor base. Very limited interaction between banks and crypto means that systemic risk remains low. But the fear is that insufficiently regulated and unsupervised crypto assets will gradually flow into traditional financial markets, polluting them with massive new risks.
Institutional investors are becoming more active but crypto markets are still mainly fuelled by retail investors, most of whom barely understand or even care about cryptocurrency fundamentals or underlying risks. The growing role of crypto exchanges makes access much easier. This is not reassuring. Not a moment too soon, financial regulators are paying more attention to the threat posed by the growing interconnectedness of crypto markets with traditional financial markets.