A new report by market intelligence firm Standard & Poor (S&P) titled ‘Cryptocurrencies Won’t Disrupt Financial Markets For Now’ found a collapse in the cryptocurrency market would not affect the credit-worthiness of rated financial institutions or disturb the banking sector’s stability.
Dr Mohamed Damak, S&P Global Ratings Financial Institutions Sector Lead, said:
“We believe that the characteristics of a cryptocurrency, in its current version, make it more like a speculative instrument that, if its market value were to collapse, would not disrupt global financial stability. For now, a meaningful drop in cryptocurrencies’ market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate.”
He adds that if cryptocurrencies become an asset class, the impact on financial services firms would be greater. It’s interesting to note that no mention is made of the potential disruption to the legacy financial services industry if the crytpo market did NOT collapse.
“We believe that the future success of cryptocurrencies will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants’ confidence in these instruments.”
The report makes the claim that cryptocurrencies have more in common with a speculative instrument, compared to an asset class or a currency and cites three reasons why it can be viewed as a “traditional bubble”.
The “bubble” fear here is that no medium or long-term investor would go near a product which increased (cryptocurrency market cap) 33 times from $17billion to $579bn over a twelve-month spell from January 2017-Jan 2018; and then in the first 10 days of February 2018 dropped by around $185bn to $394bn.
S&P’s report also warns of price manipulation with just 1,650 users (addresses) owning more than 1,000 bitcoins in their portfolio controlling as much bitcoins as the 26.3 million users with less than 100 Bitcoins in their portfolio.
The report said:
“We believe that this concentration, along with the unregulated nature of this instrument makes it prone to market manipulation.”
However the report does once again champion how blockchain technology could allow financial service firms to create a shared digital transaction ledger.
“Blockchain can be used for many banking services, including bank payments, trade finance, money transfer and post-trade services. Having a real-time standardised view of transaction data without needing to conduct multiple reconciliations would remove many of the inefficiencies that hinder the financial system, and could reduce costs considerably. Whether cryptocurrencies take off or not, we believe that banks’ role in the payment business might change materially in the next decade.”
All of these points have been made many times before by legacy organisations such as banks, and now it seems as if their legacy counterparts are trotting out the same tired arguments.