Fintech is defined in this staff memo as when financial services are combined with new technology. The fintech area includes many of the traditional services we associate with the financial system such as lending and payment mediation, but also completely new activities, for instance linked to cryptoassets.
A cryptoasset is a kind of digital asset, and the largest cryptoassets in terms of market value are Bitcoin and Ethereum. Many cryptoassets have a value that fluctuates a great deal, although there are also cryptoassets known as stablecoins that aim to maintain a stable value over time. Although the market for cryptoassets has grown rapidly, it is still only a fraction of the size of the global financial system.
Most cryptoassets have so far been used as speculative investments rather than as a means of payment. A reason for this is that they often lack characteristics that we associate with traditional means of payments – for example, that they should be quick to use and keep their value over time. Mostly private individuals have gained exposure to cryptoassets. Interest in cryptoassets among institutional investors has however increased lately, albeit with still limited investments in relation to their total assets. As the market for cryptoassets has grown in size, a market has also emerged with various financial instruments that have cryptoassets as their underlying assets.
Fintech, including cryptoassets, contributes innovation and development to the financial system, but can also present challenges for authorities and risks to the financial system. There are challenges and risks specifically linked to cryptoassets. At the same time the availability of data associated with them is limited, making it more difficult to follow the rate of risk progression. For example, cryptoassets have low – or no – consumer and investor protection and there is a certain degree of anonymity linked to cryptoassets, which means they can be used in illegal transactions. If the interconnectedness between the traditional financial system and the market for cryptoassets increases, for instance through increased exposures among traditional financial entities, this could give rise to risks to the financial system.
Cryptoassets are currently unregulated in many parts of the world. Regulatory efforts are under way in a number of jurisdictions, for instance in the EU. A number of standard-setting bodies are also pursuing work related to cryptoassets, for instance on devising standards to limit various risks that they can cause.
It is difficult to comment on the extent of exposure to cryptoassets among, for instance, Swedish households. From a global perspective, however, exposure among Swedes is considered to be relatively low. Exposure among Swedish banks and institutional investors appears thus far to be limited. The risk that shocks on the cryptoasset market would affect the Swedish financial system and its participants is therefore probably low. However, cryptoassets might affect financial stability further ahead if for instance exposures among financial entities increase.
Author: Hanna Eklööf, Financial Stability Department The author wishes to thank Christoph Bertsch, Thomas Jansson, Kristian Jönsson, Reimo Juks, Tommy Persson, Olof Sandstedt and Johanna Stenkula von Rosen from the Riksbank, and Klas Malmén and Charlotte Fried from Finansinspektionen for their valuable input during the work on this staff memo.