Crypto Is Just A Side Show

While there may be risks to individual investors, a report from S&P Global Ratings “The Future Of Banking: Cryptocurrencies Will Need Some Rules To Change The Game”, say digital currencies such as Bitcoin do not have much capacity to meaningfully upset the financial services industry at large. This from InvestorDaily.

Despite the buzz surrounding the virtual currency, the report said: “As far as rated financial institutions’ risk exposure is concerned, however, S&P Global Ratings believes that it is much ado about nothing.

“In our opinion, in its current version, a cryptocurrency is a speculative instrument, and a collapse in its market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate.”

And if crypto markets were to collapse, the brunt of the impact would not fall on major banks or its credit ratings but rather on retail investors, given they were the main contributors to activity in this market, with investors in the US, China, Japan and South Korea seemingly most exposed.

“We expect banks rated by S&P Global Ratings to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited.”

The contribution of cryptocurrencies to global wealth was also described by the report as “limited”.

“For example, the global stock market capitalization reached approximately $80 trillion at year-end 2017, meaning that cryptocurrencies are still a marginal instrument.

“Therefore, we do not foresee any systemic wealth-effect risk.”

And even if cryptocurrencies were backed by central banks and became an asset class, the effect on firms in the financial system would be “gradual”.

“We believe that the future success of cryptocurrencies will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants’ confidence in these instruments,” said S&P Global Ratings Financial Institutions Sector Lead Dr. Mohammed Damak.

Issues of consumer protection and illegal activity would need to be addressed by supranational bodies such as the G20, the report pointed out.

It also discussed the potential of the technology underpinning cryptocurrencies, blockchain, as a “positive disrupter for various financial value-chains”.

“If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability and cost of financial transactions.

“The financial market infrastructure segment might also see medium-term benefit from cryptocurrencies and blockchain through the launch of new income-generating products, such as futures or exchanges based on cryptocurrencies, or the replacement of current practices by new ones based on blockchain,” the report concluded.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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