While financial markets are abuzz with questions regarding the nature and viability of digital currencies, S&P Global Ratings believes that cryptocurrencies would need some regulation and guidance before they have a major impact on the financial markets, according to a report titled “The Future Of Banking: Cryptocurrencies Will Need Some Rules To Change The Game,” published today on RatingsDirect.
Cryptocurrencies have attracted a significant amount of attention from the market over the past 12 months. They are independent from central banks, and the risk of them infiltrating the traditional financial systems, exposing them to a possible bubble burst, is raising eyebrows at regulators.
Still, 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,” said Dr. Mohamed Damak, S&P Global Ratings Financial Institutions Sector Lead.
At this stage, we think that retail investors would be the first to bear the brunt in the event of a collapse in cryptocurrencies’ market value. We expect rated banks to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited.
If cryptocurrencies become an asset class, the impact on financial services firms will be more gradual. “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,” added Dr. Damak.
At the same time, however, blockchain technology–which is what underpins cryptocurrencies and enables the creation of a shared digital transaction ledger–could be a positive disrupter for various financial value-chains. If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability, and cost of financial transactions. The financial market infrastructure segment might also see benefit from cryptocurrencies and blockchain through the launch of new income-generating products, such as futures or exchanges based on cryptocurrencies, or the replacement of current practices by new ones based on blockchain.