Can cryptocurrencies really lead to a financial crisis?

The latest comments of Reserve Bank of India Governor Shaktikanta Das on crypto assets have sparked a debate among economists and experts.

At the BFSI Insight Summit 2022 hosted by Business Standard, Das said the next financial crisis would be caused by private cryptocurrencies. The RBI chief has always been very critical about the digital asset class.

At the summit, while reiterating that cryptocurrencies have no underlying value and pose serious risks to macroeconomic and financial stability, he underscored that private cryptos should be prohibited.

Market participants have a varied opinion on this. Some are of the view that cryptos, currently, can not lead to any financial crisis, but, in future they may. To eliminate the threat, more clear and strong regulations should be in place.

Mohammed Roshan, Co-Founder & CEO of GoSats, said financial crises have been around as long as currency and financial systems have existed. It might be a little harsh to blame it on cryptos.

“However, this is very much possible in time, but it can be prevented or its effects can be reduced if there are adequate regulations that can protect investors and the economy,” he added.

Any financial crisis can have an impact on the crypto market just as other financial markets, but the token’s market cannot be the flag bearer for the same at present, but in future they may.

Edul Patel, CEO and Co-founder, Mudrex, said cryptocurrencies alone are unlikely to cause a financial crisis since the ecosystem is still nascent compared to other financial markets.

This year has been very volatile for crypto assets as it wiped out a total notional wealth of more than $2 trillion from its market capitalization.

Investors’ sentiments, wounded by the inflation and recession fears, were further bruised by the failures of projects like LUNA and exchanges like FTX, Three Arrows, Celcius, Vauld.

A financial crisis occurs when there are systemic failures in the existing financial system, which are led by multiple factors usually beyond the control.

Patel from Mudex said countries’ political and economic uncertainties, excessive lending and borrowing, and natural disasters have predominantly contributed to the financial crisis in history.

Human behaviour like greed, the lack of regulatory checks, or black swan events like Covid-19 crisis, may lead to such situations, said Roshan. “It can be exacerbated by irrational or herd-like investor behaviour.”

There are only 153 crypto coins with high volume that are traded in many exchanges. In contrast, there are 5,886 cryptos with very low volume that are traded in a very small number of exchanges, according to a report compiled by BitStacker.

It is unfortunate to see statements such as the one classifying all cryptos with no underlying value, while we have seen how assets like Bitcoin have been adopted by countries and institutions as a superior store-of-value, Roshan said.

Patel said cryptocurrencies drive value, based on the purpose they are designed to serve. Many other cryptocurrencies also have multiple use cases, which can contribute to their values.

“For example, the Ethereum Blockchain enables developers to create decentralized applications that support decentralized finance, and the native cryptocurrency, Ether derives its value from this use case,” he added.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)