Why virtual currencies could be threat to financial stability

Why virtual currencies could be threat to financial stability
03 Aug

A new study has shown that without proper regulations, virtual currencies also known as cryptocurrencies could destabilise any country’s financial stability.

The study led by Queen Mary University of London and the Humboldt University of Berlin, found that failure by central banks to create a regulatory framework for virtual currencies could leave their economies at risk of financial crisis.

“The value of the virtual currency market is now assessed at hundreds of billions of dollars, which is startling given that all the significant growth in value has occurred in the last three years,” Jason Grant Allen noted in a statement BusinessDay received. “If this growth continues then central banks may face challenges in their monetary policies in the future.”

In the wake of latest price appreciation of the leading cryptocurrencies such as bitcoin, the valuation of the entire market is currently at $295 billion as at time of writing this article. Transaction activities have also been on the increase in Nigeria.

The report notes the “watch and wait” approach adopted by most regulators including the Central Bank of Nigeria. The report sets out the problems with this approach and describes the threat that privately issued virtual currencies pose to the international financial system.

Should the market growth continues at the rate it is, the report warns that central banks like the European Central Bank (ECB), are likely to face challenges in their monetary policies and monopoly of note issue role as a large category of money-like instruments would be out of their control.

“We recommend that a harmonised approach to regulation is taken at a European level before any virtual currency-based crisis occurs,” Rose Maria Lastra, one of the authors of the report said. “This will shape the market as it evolves and help to avoid disruption to the real economy.”



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