Could The Crypto Crash Affect The Financial System?

Stablecoins are primarily used to enable the exchange of other digital assets. They are backed by assets that may lose value or become illiquid during times of market stress, and the laws and disclosures governing those assets and investors' redemption rights are opaque.

According to authorities, this might leave stablecoins vulnerable to a loss of investor trust, particularly during times of market stress. There are fears that if the 'stable coins' backed by actual assets come under too much strain, they would collapse.

“you could see the crypto crash leak into the real world, the real markets”, said Bernard Hickey.

​When asked how a total crash of Bitcoin and other cryptocurrencies  would affect the various  economies, Rebecca Stevenson responded:

“When we have that situation where now we have real concerns about this unregulated asset sort of tipping over and affecting other things that we do have control over, we’re going to see regulation. It has grown like topsy and we are now seeing that it’s become so big that it could potentially affect other asset classes, which is a big concern”.

Other concerns are rising, warn officials, as more organizations' fates are connected to the performance of crypto assets and traditional financial institutions get increasingly involved in the asset class.

​In March, for example, the Acting Comptroller of the Currency cautioned that crypto derivatives and unhedged crypto exposures might trip up banks since they are working with little historical pricing data.

Nonetheless, regulators are divided on the magnitude of the harm a crypto crisis presents to the financial system and the broader economy.