You are on page 1of 9

20/4/2018 Cryptoassets: source of systemic financial risk?

– Emiliano Giupponi – Medium

Emiliano Giupponi Follow


@emigiupponi, working at Argentinian Central Bank. PhD economics student at UBA
Apr 17 · 8 min read

Cryptoassets: source of systemic nancial


risk?
[Non-o cial translate of the original post published at Central Bank of
Argentine blog]

Cryptoassets have begun to receive some attention on the international


economic agenda. Central banks and regulators are beginning to
discuss their nature, bene ts and risks. An example of this is that in the
last meeting of Finance Ministers and Central Bank Presidents of the
G20 held last March in Buenos Aires, it was decide to include the
analysis of this type of assets in the agenda. The G20 has called on
organizations that set international standards to intensify monitoring
of them. In this framework, this post will focus exclusively on providing
information regarding the question of the systemic relevance of this
type of instrument[1]. As will be shown, the quantitative relevance of
Cryptoassets remains limited.

Cryptoassets
To analyse the Cryptoassets, it is necessary the study on the technology
behind them: Distributed Ledger Technology (DLT). These networks
can be thought as a large spreadsheet, openly shared on the Internet,
where only things can be added, and where the information is
controlled by the users of the system themselves. The previous blog
post, “Blockchain: ¿cómo puede contribuir esta tecnología al sistema
nanciero?”, provides a detailed view on the meaning of this type of
network and its use in the nancial system. This post will refer only to
its application on cryptoassets.

Although the cryptoasset de nition is in an evolving process,


cryptoassets have certain characteristics in common. Firstly, as was
mentioned, these assets are created within distributed networks. That
is, these assets permit the information ow to be recorded within each
system. For instance, for the Bitcoin network (with capital letters), the
native asset is also called bitcoin (with lowercase letters). For the
Ethereum network, its native asset called ether. Secondly, Cryptoassets
are generally built over open networks that have decentralised
veri cations. Anyone could join the network to check the information.
In this sense, cryptoassets have no central regulatory authority. Thirdly,

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 1/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

these are cryptographic because they use techniques to verify the


information ow. Cryptography is use in order to prevent the decoded
message from being read by the designated user[2].

However, apart from these common characteristics, the cryptoassets do


not have an explicit consensus of their functions and legal status.
Cryptoassets could classi ed into three categories: cryptocurrencies,
cryptocommodities and cryptovalues. Cryptocurrencie classi cation
generally refers to the potential acceptability as a means of payment.
Commodity characterisation is relate to the potential ability to provide
digital access to a speci c application or service. Finally, cryptovalues
classi cation involves the possibility of being treated as securities
(stocks and bonds, for instance)[3].

In terms of their classi cation as cryptocurrencies, central banks and


regulators agree that these assets cannot considered as a currency
because they do not ful l the traditional functions of money and are
not legal tender. High price volatility prevents them from considered as
reserve assets of value[4]. In addition, high transaction costs and
transaction times impose a strong restriction on their use as a means of
payment (Yermack 2013, BoE 2014, Banco Central Europeo 2015,
Fondo Monetario Internacional 2016). For these reasons, the term
cryptoactive will be adopted as a convention in the present proposal.
(BoE 2018).

Relevance
In order to analyze the quantitative relevance of Cryptoassets, I present
and compare its capitalization levels against other assets from the
international nancial market. The three major ones per capitalization
level to be analysed are bitcoin, ether and ripple. The period of study
begins in 2017 and continues to the present[5].

I analyse cryptoactive prices will be e in connection to their


capitalization levels. Prices increased exponentially from the beginning
of 2017 to the end of that year and then rapidly declined to their
present levels. In Table 1, it is possible to observe that bitcoin increased
almost 17 times between January and December 2017. Ether and
ripple increased even more. In the case of ether, prices increased almost
125 times between January 2017 and January 2018. For ripple, the
prices increased almost 500 times over the same period from initial
values.

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 2/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

Table 1. Selected maximum cryptoactive prices. U$S. Source: Own elaboration based on CoinMetrics
data

From these historical highs, prices have fallen dramatically. At present,


bitcoin prices have been reduced by almost half. For ether and ripple,
the falls have been even greater. This exponential growth in prices and
capitalization between the end of last year and the beginning of this
year has raised doubts about the existence of a possible speculative
bubble. This is Paul Krugman´s and Joseph Stiglitz´s view.

Market capitalisation size is analysed in terms of the particular price


dynamics of these assets. The high price of December and January
prices generated a capitalization around US$ 825 billion across all
existing crypto assets. If compared to other global nancial system
instruments, this maximum historical capitalization value is still
relatively small, as it represents only 1% of global stocks markets.
However, the maximum capitalization achieved by bitcoin, for
example, it is similar to the capitalization levels of individual
companies such as Visa and JPMorgan (Figure 1).

Figure 1. Cryptoactive and other nancial system assets capitalization. US$ in Billion. Source: own
elaboration based on CoinmarketCap, IMF, The World Factbook and World Exchanges data.
M1=banknotes and coins+deposits

In term of daily trading, in the rst three months of 2018, the trade of
all cryptoassets is less than 1% of the volumes of the S&P 500.

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 3/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

However, over the same period, bitcoin trading are 7 times higher than
that of SPDR Gold Shares (Figure 2).

Figure 2. Daily trading volume (average 1st quarter 2018). US$, in billions. Source: Own elaboration
based on CoinMetrics

In order to measure the use of cryptoactive, it is necessary to analyse


transactions in each of its platforms. The data should be treated
carefully. The technology in these assets makes di cult to estimate the
number of transactions.

Figure 3. Transactions (monthly averages). In Quantities. Source: Own elaboration based on


CoinMetrics

The site CoinMetrics performs a data standardization from usual webs


portals. Transaction increase during 2017 can be observe for two of the
three main Cryptoassets, ether and ripple. However, in the case of
Bitcoin, it has remained at similar levels from June of last year (Figure
3) [6].

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 4/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

Linking Cryptoassets to the traditional nancial


system
Now, there are no available data showing the holding of cryptoassets by
global systemic banks. However, nancial derivative contracts could
become a gateway [7]. Last December, CME (“Chicago Mercantile
Exchange”) and CBOE (“Chicago Board Options Exhange”) started
trading on bitcoin derivatives contracts. In a context of increased crypto
asset prices, institutional investors took sell positions (in net terms)
over the new markets. This dynamic has di ered from the observed in
retail agents’ portfolios, which maintained a relatively stable (net)
buying position since the beginning of the transaction. Based on
Commodity Futures Trading Commission (CFTC) data, open positions in
these markets totaled approximately US$ 280 million at the end of
March (Figure 4). Open positions and the net selling position may be
showing limited initial interest from institutional investors and some
aversion to the volatility of this type of asset.

Figure 4. Leveraged funds and retail agents net positions on bitcoin futures. In quantities. Source:
Own elaboration based on CoinMetrics data.

To analyse the relationship between Cryptoassets and traditional


nancial assets, I look the correlations between the yields of the three
main Cryptoassets bitcoin, ether and ripple against a dollar index
(Dollar Index Spot -DXY-)[8], the gold price (GOLD) and the S&P 500
stock market index (SP500). Data is from the rst quarter of this year.

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 5/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

Figure 5. Cryptoassets and traditional assets correlation. High and positive correlation in green. High
and negative correlation in red. Mean correlation in yellow. Low blank correlation. Source: Own
formulation based on CoinMetrics data

In Figure 5, we can see an average correlation between the three


cryptographic assets (top left). A considerable correlation can be
observed among traditional assets (bottom right). Finally, there is little
relevant correlation between cryptoassets and traditional assets
(athough ether appears to be stronger). [9]. The results would suggest
that, at present, there is a low association between cryptoactive and
traditional markets.

Concluding remarks
The main preliminary nding is, rst, the current size of the
cryptoactive system is small in relation to the traditional nancial
system, although it is rapidly increasing. Second, there does not seem
to be a signi cant association between traditional and cryptoactive
asset market behaviour.

From these ndings, it could be inferred that cryptoactive system


would not be a signi cant source of vulnerability to the global nancial
systems at present.[10] . However, it could become risky in the future if
the system grows considerably or begun to interact strongly with
nancial sector actors and infrastructure. These rst ndings are in line
with the global regulatory authorities’ conclusions and, in particular,
the conclusions of the G20 at its last meeting of Ministers of Finance
and Central Bank Presidents.

I expect to continue monitoring and analysis of the cryptoassets system


in futures post.

Thanks to my colleagues at the Central Bank for their thoughtful


feedback.

Footnotes:

Footnotes:

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 6/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

[1] It is important to note that the discussion on the possible challenges


and/or risks associated to cryptoactives usually includes issues related
to the protection of consumers and investors, the integrity of nancial
markets (banking, payments, among others), taxation, and money
laundering. This entry will not cover these aspects. It will concentrate
on a macro-prudential issue.

[2] The cryptographic techniques used in most crypto (Bitcoin and


Ethereum) are hashing mechanisms that validate the integrity of
information and digital signatures to prove the “ownership” of an asset,
without necessarily exposing the identity.

[3] For instance, see the classi cation of the German Federal Financial
Supervisory Authority and the Swiss Financial Market Supervisory
Authority (FINMA). Also, see the book by Chris Burniske and Jack
Tatar (2017) Cryptoassets: The Innovative Investor’s Guide to Bitcoin and
Beyond, MCGrawHill.

[4] La volatilidad podría ser una característica intrínseca a muchos


criptoactivos. Dada la oferta predeterminada ex ante, el precio
dependería de las variaciones de la demanda.

[5] According to CoinmarketCap, there are currently more than 1,500


cryptoactives, whereas before 2013 only 5 were identi ed..

[6] This is particularly remarkable given that price bubbles are


generally associated with larger numbers of transactions.

[7] See, for instance, Mario Dragui’s statements in the European


Parliament plenary debate on the ECB Annual Report for 2016

[8] It is a geometric weighted average of the value of the dollar


compared to: Euro (EUR), 57.6%, Japanese Yen (JPY), 13.6%, Pound
Sterling (GBP), 11.9%, Canadian Dollar (CAD), 9.1%, Swedish Krona
(SEK), 4.2% Swiss Franc (CHF) 3.6%. When the DXY rises, the dollar
appreciates against the other currencies, while when the DXY falls, the
greenback depreciates.

[9] It is interesting to note that the sign of the correlation between the
dollar and cryptoactives is the same as that of the correlation between
the dollar and the rest of the traditional assets, although with a lower
value.

[10] The analysis should be complemented by an examination of


potential exposures (with potential direct and/or indirect equity

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 7/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

impacts) to these instruments by individual entities, especially those


with some systemic signi cance. There is currently no data available to
allow for such an analysis.

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 8/9
20/4/2018 Cryptoassets: source of systemic financial risk? – Emiliano Giupponi – Medium

https://medium.com/@giupponie/cryptoassets-source-of-systemic-financial-risk-639c21ce4282 9/9

You might also like