Transmission channels affecting financial stability

If crypto-assets become a more significant part of the financial system, negative developments
involving crypto-assets could undermine confidence in certain aspects of the financial system and in financial regulators. Additionally, the primary risks present in the crypto-asset markets could have financial stability implications through a variety of other transmission channels.

These include (i) confidence effects; (ii) financial institutions’ exposures to crypto-assets, related financial products and entities that are financially impacted by crypto-assets; (iii) the level of market capitalisation of crypto-assets; and (iv) the extent of their use for payments and settlements.
Overall, although some data gaps remain (as discussed below), it appears that risks to global financial stability are not significant at present, given the limited size of crypto-asset markets relative to other financial markets and the limited interconnectedness between crypto-asset markets and the regulated financial system. While the increase in prices was very large, and in fact larger than comparable historical asset bubbles, the market capitalisation relative to other financial markets and comparators has remained small.

If any of the risks factors above were to change materially, this may warrant reassessment of financial stability risks. Moreover, such risks could arise first within specific jurisdictions, where they could become relevant for domestic financial stability, before they became relevant for the global financial system.