People’s Bank of China Issues Warning on Crypto Risks in Financial Stability Report 2023
In Brief
People’s Bank of China highlighted risks associated with crypto-assets that can affect financial stability in Financial Stability Report 2023.
In its latest “China Financial Stability Report (2023)“, the People’s Bank of China (PBOC) has sounded an alarm on the risks associated with crypto-assets within the context of emerging threats to financial stability.
Released recently, the report highlights the financial and digital technology risks inherent in crypto-assets, defining them as private sector digital assets reliant on cryptography, distributed ledgers or similar technologies for their development and operation.
Crypto-assets, as outlined in the report — stand distinct from traditional currencies in that they are not issued by monetary authorities and lack attributes such as legality and compulsory nature. Moreover, PBOC asserts that the decentralized nature of their business models makes them susceptible to a dual set of risks – financial and digital technology and aggravated by inadequate supervision.
Delving into the financial realm, the report highlights the manifestation of risks seen in traditional unregulated illegal financial activities, including asset price bubbles, substantial price fluctuations, liquidity and maturity mismatches, high leverage and procyclical risks.
Simultaneously, the digital technology sphere is said to introduce novel risks, such as the absence of a “negative feedback” adjustment mechanism in automatically executed smart contracts, potentially leading to market disruptions like a “flash crash.”
Digital Risks and China’s Proactive Measures in the Crypto-Asset Space
The 2023 Financial Stability report further details that additional digital risks encompass security vulnerabilities in the interaction between blockchain and off-chain data, making them susceptible to cyberattacks. This vulnerability exposes the market to potential manipulation and asset losses.
Furthermore, the governance structure of decentralized finance (DeFi) is characterized as having “centralized” traits, rendering it susceptible to control by a select few insiders, thereby jeopardizing the interests of other investors. The anonymous nature of crypto assets and the associated difficulty in recovery also contribute to anti-money laundering and anti-terrorist financing risks.
The report notes that China has already undertaken measures to mitigate risks in the crypto-asset space, including cleanup and rectification efforts. Presently, the scale of crypto assets constitutes a minor fraction of global financial assets with limited connections to the traditional financial system. Despite this, the report warns that the rapid development, intricate business models, opaque governance structures and active cross-border engagements in the crypto sector could pose a threat to the stability of the global financial system.
China’s proactive stance in addressing these concerns was also emphasized in the report, citing previous cleanup and rectification efforts in areas like token issuance and financing, as well as crypto-asset trading platforms.
The issuance of the “Notice on Further Preventing and Dealing with Speculation Risks in Virtual Currency Transactions” in 2021 aimed to reflect China’s united front across multiple departments, working collaboratively to prevent, resolve and manage risks effectively in related fields, thereby curbing potential threats to financial stability.
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Victor is a Managing Tech Editor/Writer at Metaverse Post and covers artificial intelligence, crypto, data science, metaverse and cybersecurity within the enterprise realm. He boasts half a decade of media and AI experience working at well-known media outlets such as VentureBeat, DatatechVibe and Analytics India Magazine. Being a Media Mentor at prestigious universities including the Oxford and USC and with a Master's degree in data science and analytics, Victor is deeply committed to staying abreast of emerging trends. He offers readers the latest and most insightful narratives from the Tech and Web3 landscape.
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Victor is a Managing Tech Editor/Writer at Metaverse Post and covers artificial intelligence, crypto, data science, metaverse and cybersecurity within the enterprise realm. He boasts half a decade of media and AI experience working at well-known media outlets such as VentureBeat, DatatechVibe and Analytics India Magazine. Being a Media Mentor at prestigious universities including the Oxford and USC and with a Master's degree in data science and analytics, Victor is deeply committed to staying abreast of emerging trends. He offers readers the latest and most insightful narratives from the Tech and Web3 landscape.
