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Cryptos aren’t assets, pose little market risk: S&P

Cryptocurrency, currency

As cryptocurrencies are more like speculative instruments than actual assets, a collapse would have little impact on financial markets, a ratings agency has said.

S&P Global Ratings said that while cryptocurrencies currently occupy significant space in financial market discussions, the likelihood of a crypto-collapse impacting financial markets is slim.

“We believe that the characteristics of a cryptocurrency, in its current version, make it more like a speculative instrument that, if its market value were to collapse, would not disrupt global financial stability,” S&P said.

However, given that cryptocurrencies are independent from central banks and as such the chances of them entering traditional financial systems, also exposes them to a potential bubble burst.

Financial institutions sector lead at S&P Dr Mohamed Damak said, “For now, a meaningful drop in cryptocurrencies' 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.”

Retail investors to take the hit

While a collapse would have little ramifications for the wider markets, retail investors would bear the brunt, S&P said, pointing to the fact that rated banks should be protected given limited direct and indirect exposure to the currencies.

However, should cryptocurrencies become an asset class there would be a “more gradual” impact on financial services.

“We believe that the future success of cryptocurrencies will largely depend on the co-ordinated approach of global regulators and policymakers to regulate and enhance market participants' confidence in these instruments," Dr Damak added.

S&P conceded that blockchain technology has positive applications for the financial sector and could have a lasting and significant impact upon how the sector tracks financial transactions.

“The financial market infrastructure segment might also see 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,” S&P said.

 

Cryptos aren’t assets, pose little market risk: S&P
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