DNB: All that glitters is not gold in crypto-assets

December 14, 2023

At the Digital Money Conference in Korea today Steven Maijoor said investing in crypto-assets, despite all of the regulatory progress we’ve made, continues to be a risky affair – as the past two years have shown.

The rapid pace of developments in these markets and continued interest from traditional financial institutions mean crypto-asset activities could soon pose a significant threat to global monetary and financial stability. It’s crucial therefore that jurisdictions around the globe fully implement the FSB’s Global Regulatory Framework to mitigate potential risks to the stability of the financial system.

Date: 14 december 2023
Speaker: Steven Maijoor
Location: Digital Money Conference, Seoul

During the long plane ride here I had the time to dig up some facts about the Korean crypto sector. One website I found claimed that around 2 million Koreans held crypto-assets in 2022. Interestingly enough, at De Nederlandsche Bank, we estimate that around 2 million Dutch people have also invested in cryptos. That is even more impressive if you consider that there are only around 18 million people living in the Netherlands versus 51 million in the Republic of Korea. 

I think this relatively high uptake has motivated both our jurisdictions to take steps towards regulating these activities. In my experience this has proven very challenging given the evasive actions of certain globally operating crypto companies – an issue I am sure that many of you here today will recognise. But also an issue which I think we can solve through closer collaboration and coordination across borders.

We Dutch have a reputation for being blunt. Sometimes that has its upsides. For example if you want to get a message across clearly. And I have an important message to share with you today – so let me speak as plainly as possible: all that glitters is not gold in crypto-assets. 

Investing in crypto-assets, despite the great regulatory progress we’ve made, continues to be a risky affair – as the past two years have shown. In my opinion it would be foolish to expect crypto to just ‘burn’ and disappear forever. It’s crucial therefore that jurisdictions around the globe fully implement the FSB’s Global Regulatory Framework to mitigate potential risks to the stability of the financial system.

I’ve been closely involved in the development of this framework since early 2022. Let me reflect briefly on the progress we have made so far. 

For a long time crypto-asset activities did not pose a threat to global financial stability as they were a relatively isolated experiment on the fringes of the financial system. That began to change when retail interest picked up strongly during the pandemic.

At the same time, we saw a growing number of traditional financial institutions investing in these assets or in the underlying technology. Both developments fuelled the risk of crypto turmoil spilling over to other sectors going forward.

Considering the rapid pace of developments, the clear risks involved in these activities and the lack of regulatory consistency around the globe, we concluded in 2022 that global policy action was warranted.

The FSB’s recommendations are based on the famous ‘same activity, same risk, same regulation’ principle. Because if you look closely at the underlying economic function of these activities, they clearly resemble traditional financial activities. And therefore they give rise to very similar risks, such as the liquidity mismatch involved in the practice of staking.

After all, how is this fundamentally any different from the century-old practice of accepting commercial bank deposits? So, I would like to encourage everyone to keep looking past the smoke and mirrors: when something seems too good to be true, it all too often is. 

As I mentioned before, it’s very important that authorities around the globe take decisive action to implement the FSB’s framework. Let me highlight three issues I see going forward: 

First, the emergence of crypto-asset markets has clearly brought a broader set of societal issues to the fore. One important issue, that I am sure we will cover further today, is the risk to monetary sovereignty that crypto-assets could pose in emerging markets.

Ahead of this year’s G20 Leaders’ Summit, the FSB and the IMF published a joint synthesis paper bringing together our recommendations to address stability-related risks as well as the monetary risks. A key conclusion of the report is that emerging markets, given relatively high adoption rates, may already be faced with heightened risks to domestic financial stability.

To address both types of risks in emerging markets, the paper concludes that comprehensive regulation of crypto-activities is needed – in line with earlier recommendations by the IMF and the FSB. To coordinate effective and flexible implementation of our respective policy frameworks, the paper has also put forward a G20 crypto roadmap. The IMF, the FSB, and other SSBs will work closely together on this roadmap in the coming year. 

Second, I see that the market continues to evolve rapidly – for example in the field of stablecoins. The FSB will continue to monitor closely how market structures evolve and adjust its policy response if necessary. Past market strains have, for example, highlighted how current stablecoins are not as stable as their name may suggest.

Also, for other crypto-assets, like Bitcoin, I expect that market prices will remain quite volatile. As the valuation of most crypto-assets relies solely on what investors expect them to be worth in the future, their market price is very sensitive to changes in investor sentiment.  

Third, some have suggested that the recent failures of centralised crypto-service providers could prompt a move towards decentralised finance, often abbreviated as DeFi. Let me reiterate once more that not everything is what it initially seems to be in crypto-assets.

For example, our on-chain analysis found that DeFi governance tokens, which are used to decide on important changes to a DeFi protocol, are often held by a highly concentrated group of owners. To my mind, that’s not particularly decentralised…  

All in all, there are many issues to discuss. So, let me stop here for now.