Working Paper: CEPR ID: DP18331
Authors: Raphael Auer; Marc Farag; Ulf Lewrick; Lovrenc Orazem; Markus Zoss
Abstract: The phenomenal growth of cryptocurrencies raises important questions about their footprint on the financial system. What role are traditional financial intermediaries playing in cryptocurrency markets and what drives their engagement? Are new nodes emerging? We help answer these questions by leveraging a novel global supervisory database of banks’ cryptocurrency exposures and by synthesising a range of complementary data sources for other types of institutions. We find that major banks’ exposures currently remain at very modest levels. Across countries, higher innovation capacity, more advanced economic development, and greater financial inclusion are associated with a higher likelihood of banks taking on cryptocurrency exposures. We show that substantial activity is concentrated in lightly regulated crypto exchanges. This “shadow crypto financial system” serves both retail and institutional clients, such as dedicated investment funds. An uneven regulatory treatment across banks and crypto exchanges and significant data gaps suggest that a proactive, holistic and forward-looking approach to regulating and overseeing cryptocurrency markets is needed. It should focus on ensuring a more level playing field with regard to financial services provided by established financial institutions and intermediaries in the emerging crypto shadow financial system by introducing more stringent regulatory and supervisory oversight for the latter.
Keywords: cryptocurrencies; decentralised finance; digital currencies; financial regulation; financial supervision; stablecoin
JEL Codes: E42; G12; G21; G23; G28; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited regulatory engagement from banks (G28) | dominant role for crypto exchanges (E42) |
| regulatory treatment (L51) | institutional adoption of cryptocurrencies (E42) |
| growth of cryptocurrencies (E42) | increased systemic risks (F65) |
| higher innovation capacity (O36) | banks' likelihood of engaging in cryptocurrency markets (G21) |
| more advanced economic development (O55) | banks' likelihood of engaging in cryptocurrency markets (G21) |
| greater financial inclusion (F65) | banks' likelihood of engaging in cryptocurrency markets (G21) |