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Financial risks from unregulated cryptos

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Digital currencies could trigger a financial meltdown unless governments take swift action to regulate this market, the Guardian quoted a senior Bank of England policymaker as saying.

Likening the growth of cryptocurrencies to the spiralling value of US sub-prime mortgages before the 2008 financial crash, deputy governor Sir Jon Cunliffe said there was danger financial markets could be rocked in a few years by an event of similar magnitude, the Guardian wrote.

The unregulated market of digital currencies like bitcoin attracted many retail investors who saw the opportunity to turn a quick profit with relatively little capital in the past few years.

Five years ago, bitcoin was trading around $700; however, its current value reached $56,000.

Such enormous profits continue to attract retail investors, especially young people who are fuelling demand for digital currencies, but at the same time are exposed to enormous market risk, let alone the risk of market abuse inherent in every market, especially the ones that are unregulated.

Digital currencies can gradually enter more aggressively the real economy as people become more familiar with them in business and personal transactions.

As companies acquire digital currencies or accept payment and collateral in them, their balance sheets are becoming infected with an asset that is not only unregulated, but perhaps more importantly, its value can collapse without warning or change in the macroeconomic environment, unlike real currencies.

Digital currencies are not currencies, ECB chief Christine Lagarde said only a month ago.

But their proliferation in the real economy is making them quasi currencies.

Soon or later, the accounting profession will have to develop new standards to treat them because they are classified neither as currency nor as a financial asset, at least not yet.

CySEC’s new chairman, George Theocharides, named digital currencies as one of the challenges for regulators.

Criminal activities

Digital currencies currently pose a serious threat to money laundering and financing criminal activities. For example, earlier this month, the FBI arrested a nuclear engineer and his wife for attempting to sell secrets to a foreign power in exchange for cryptocurrency.

The federal employee asked to be paid in monero cryptocurrency.

“I am very aware of the risks of blockchain analysis of bitcoin and other cryptocurrencies and believe monero gives both of us excellent deniability,” he told an undercover FBI agent.

According to Bitcoin News, Jonathan Toebbe, who served as a nuclear engineer, was assigned to the Naval Nuclear Propulsion Program, also known as Naval Reactors.

He held an active national security clearance through the US Department of Defence, giving him access to restricted information.

Such cases underline the threats to the real economy from digital currencies, but more importantly, the need to regulate them the way they have every other financial instrument.

The European Union and ESMA, in particular, should take action immediately to stop or limit the unregulated trading of digital currencies that pose a substantial threat to an increasing number of retail investors.

History taught us the ascent of many assets could cause a tremendous fever among investors analogous to the gold rush last century or the technology stocks 20 years ago.

But their fall can be so spectacular that it can wipe out fortunes within hours.

Policymakers in every central bank in Europe and the ECB should consider the consequences of such a scenario before it’s too late.

 

Michael S. Olympios is an economist, business advisor, Editorial Consultant to the Financial Mirror

[email protected]