Does the cryptocurrency crash pose a threat to the financial system?

WASHINGTON, May 11 (Reuters) – On Tuesday, bitcoin
fell briefly below $30,000 for the first time in 10
months, while cryptocurrencies overall have lost nearly $800
billion in market value in the past month, according to data
site CoinMarketCap, as investors fret about tightening monetary
Compared with the Fed’s last tightening cycle which began in
2016 crypto is a much bigger market, raising concerns about its
interconnectivity with the rest of the financial system.


In November, the most popular cryptocurrency, bitcoin, hit
an all-time high of more than $68,000, pushing the value of the
crypto market to $3 trillion, according to CoinGecko. That
figure was $1.51 trillion on Tuesday.

Bitcoin accounts for nearly $600 billion of that value,
followed by ethereum, with a $285 billion market cap.

Although cryptocurrencies have enjoyed explosive growth, the
market is still relatively small.

The U.S. equity markets, for example, are worth $49 trillion
while the Securities Industry and Financial Markets Association
has pegged the outstanding value of U.S. fixed income markets at
$52.9 trillion as of the end of 2021.


Cryptocurrency started out as a retail phenomenon, but
institutional interest from exchanges, companies, banks, hedge
funds and mutual funds is growing fast.

While data on the proportion of retail versus institutional
investors in the crypto market is hard to come by, Coinbase, the
world’s largest cryptocurrency exchange, said institutional and
retail investors each accounted for about 50% of the assets on
its platform in the fourth quarter.

Its institutional clients traded $1.14 trillion in crypto in
2021, up from just $120 billion in 2020, Coinbase said.

Most of the bitcoin and ethereum in circulation is held by a
select few. An October report from the National Bureau of
Economic Research (NBER) found that 10,000 bitcoin investors,
both individuals and entities, control about one-third of the
bitcoin market, and 1,000 investors own approximately 3 million
bitcoin tokens.

Approximately 14% of Americans were invested in digital
assets as of 2021, according to University of Chicago research.


While the overall crypto market is relatively small, the
U.S. Federal Reserve, Treasury Department and the international
Financial Stability Board have flagged stablecoins – digital
tokens pegged to the value of traditional assets – as a
potential threat to financial stability.

Stablecoins are mostly used to facilitate trading in other
digital assets. They are backed by assets that can lose value or
become illiquid in times of market stress, while the rules and
disclosures surrounding those assets and investors’ redemption
rights are murky.

That could make stablecoins susceptible to a loss of
investor confidence, particularly in times of market stress,
regulators have said.

That happened on Monday, when TerraUSD, a major stablecoin,
broke its 1:1 peg to the dollar and fell as low as $0.67,
according to CoinGecko. That move partly contributed to
bitcoin’s fall.

Although TerraUSD maintains its tie to the dollar through an
algorithm, investor runs on stablecoins that maintain reserves
in assets like cash or commercial paper could spill over into
the traditional financial system, causing stress in those
underlying asset classes, say regulators.

With more companies’ fortunes tied to the performance of
crypto assets and traditional financial institutions dabbling
more in the asset class, other risks are emerging, say
regulators. In March, for example, the Acting Comptroller of the
Currency warned that banks could be tripped up by crypto
derivatives and unhedged crypto exposures, given they are
working with little historical price data.

Still, regulators overall are divided on the size of the
threat a crypto crash poses to the financial system and broader

(Reporting by Hannah Lang in Washington; Editing by Michelle
Price and Matthew Lewis)

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