Cryptocurrencies could trigger the next financial crisis if they become a systemic risk to the financial system, according to one cryptocurrency expert.
Although cryptocurrencies do not yet pose this risk to the system, if they become more widely embraced they could be destabilising.
The lack of reliable investment advice about cryptocurrencies could also cause many investors to “get hurt.”
LONDON — Cryptocurrencies could trigger the next financial crisis if they become a systemic risk to the financial system, a cryptocurrency expert has said.
A growing range of financial institutions are expressing interest in cryptocurrencies, such as bitcoin and ethereum. But in what is a fast moving situation, they could become “systemically important” to the point of posing a “systemic risk,” according to Garrick Hileman, an economic historian at the University of Cambridge told Business Insider.
To date, said Hileman, “there haven’t been enough people who hold them [cryptocurrencies] or institutions that own them, or enough credit or leverage used. Having said that, I can imagine scenarios — although I’m not predicting this — where they do become systemically important,” he said.
Bitcoin has soared in value this year, rising over 1,000% against the dollar so far. This has prompted both increased interest and concern from investors and financial executives. EU and UK authorities are planning to crack down on bitcoin as concerns grow that cryptocurrencies are being used to facilitate financial crimes and launder money.
Were there to be another crash, said Hileman, it’s possible there would be an even greater backlash against traditional banks than after 2008 — in the wake of which bitcoin was first developed — and cryptocurrencies could be even more widely embraced.
But, as a growing range of financial institutions enter the space, cryptocurrencies could also “trigger” the next crisis. Indicative of change, said Hileman, “we’re seeing more hedge funds come into the space,” and new investments such as a bitcoin futures market emerge.
A survey published on Tuesday by the Centre for Macroeconomics found the predominant view among economists is cryptocurrencies do not yet pose such a risk, because they are “too small and too detached from other financial markets.”
But integration with more traditional financial markets is “starting to happen,” said Hileman, and things are “moving very quickly.”
Not only could cryptocurrencies threaten stability, said Hileman, they could also “exacerbate” the next crisis.
“You can now exit [traditional banking systems] relatively easily into something that is disconnected, and that could exacerbate a crisis,” he said.
One crucial problem, said Hileman, is the lack of reliable information about the value of cryptocurrencies. The existence of “pump and dump” scams, where traders artificially inflate prices at investors’ expense, is problematic, and this is compounded by the fact that valuation models “are still being developed.”
“There’s a fear of missing out — who can you trust is a difficult question,” he said. This is an area that needs significant attention, said Hileman, or “a lot of people are going to get hurt.”