Cryptoassets may entail risks to the financial system

News, Staff memo Fintech contributes innovation and development in the financial system, but can also present challenges for authorities and risks to the financial system, particularly with regard to cryptoassets. As fintech and cryptoassets have increased in size, authorities and central banks, like the Riksbank, have an increased focus on following the progression of the market for fintech and cryptoassets, writes the economist Hanna Eklööf in “An overview of fintech and cryptoassets”.

Read the entire Staff Memo: An overview of fintech and cryptoassets

The fintech sector, that is, the combination of financial services with new technological innovations, has grown rapidly in many countries in recent years, not least in Sweden. The same applies to cryptoassets, a kind of digital asset of which two of the best known are Bitcoin and Ethereum.

Hanna Eklööf explains what fintech and cryptoassets are and how they have developed. She also addresses various risks and challenges that they pose to private individuals, the financial system, authorities and central banks alike.

There are challenges and risks specifically linked to cryptoassets. In addition, the availability of data is limited, making it more difficult to follow the rate of risk progression. Cryptoassets also have low consumer and investor protection, which may pose risks for the private individuals who have invested in them.

So far, it is primarily private individuals that have purchased cryptoassets and, to a more limited extent, market participants such as banks and institutional investors. Consequently, the risk of shocks on the cryptoasset market affecting the Swedish market and traditional financial system is probably low at present. However, if the interconnectedness between the financial system and the cryptoasset market were to increase, for instance through an increase in exposures among traditional financial entities, this could give rise to risks to the financial system and stability.

Many central banks, authorities and international organisations therefore have an interest in following the progression of the cryptoasset market. In line with this, work is also under way on developing, for example, standards and regulations linked to cryptoassets. Among other things, the aim of these are to manage the risks associated with cryptoassets and to improve consumer and investor protection.

By Hanna Eklööf, economist at the Financial Stability Department

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Updated 19/05/2022