Column-Crypto Regulators May See 10% Household Exposure as High Watermark: Mike Dolan

Since the beginning of the year, major cryptocurrencies such as bitcoin and ether have fallen 40-50% and an earthquake has struck the parallel world of “stable currencies”, so-called anchored tokens that serve as links between mainstream financial institutions. and the twilight zone of cryptofinance, or “decentralized” finance.

Another typical year in the underground financial regions? Caveat, some would say.

But the latest twists and turns have struck another nerve with governments and central banks who fear they have spiraled out of this ecosystem, without adequate oversight and enough transparency, to reach levels above which they may find it difficult to control or manage. consolidate.

G7 finance leaders, meeting in Germany late last week, cited the turmoil surrounding cryptocurrency and urged the Financial Stability Board to “promote the rapid development and implementation of coherent and comprehensive.”

The head of France’s central bank, François Villeroy de Galhau, endorsed the message this week and raised the urgency at the World Economic Forum in Davos, where he warned of lax investment protection and money laundering risks.

“It is now a matter of urgency… I very much hope that we will have this regulation in Europe this year,” said Villeroy.

While still relatively modest compared to stocks, bonds or real estate, two surveys published this week by the US Federal Reserve and European Central Bank show that at least 10% of all households in the two regions have cryptocurrencies as their investment. in the year 2021.

The Fed’s annual “Survey of Household Economics and Decisionmaking” surveyed 11,000 adults late last year and painted a relatively healthy picture for consumer finances in general — though it wasn’t reached before one of the worst starts to the year in more than 20 years. year.

When we first asked about cryptocurrencies, the survey found that 12% of adults had used or owned cryptocurrencies for investment purposes in the past 12 months. Less than 3% had a reason to use it for payment or wire transfer purposes.

While this figure may differ from estimates that just over 50% of U.S. households own stocks for savings or retirement purposes, it’s likely an inconvenient stock for governments that view such tokens as irrelevant. about financial sharks burning inexperienced savers.

And if, as some estimate, a majority of those holding the tokens have arrived in the past year and are underwater at levels above $30,000 or less, limiting the damage could be their number one task, watchdogs and governments.

ECB director Christine Lagarde said this week that bitcoin and hundreds of other lesser-known tokens are “worthless”.

Chart: Cryptocurrency usage chart from ECB household survey – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrnkexvm/One.PNG

Chart: Cryptocurrency usage chart from the Fed Household Survey – https://fingfx.thomsonreuters.com/gfx/mkt/egvbkwjaxpq/Two.PNG

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WITHOUT VALUE?

And for those who think this is all just fun for wealthy people who can afford to lose a few fringe funds in a puff of smoke, there were other sobering details in the Fed’s investigation. While nearly half of those who invested in crypto had annual incomes of $100,000 or more, nearly a third were earning less than $50,000.

The ECB’s consumer expectations survey echoed the Fed’s findings, showing that as many as 10% of euro-zone households now hold cryptocurrency tokens in one form or another.

Like the Fed’s estimate, it showed a “U”-shaped curve in the income quintiles and financial literacy of those invested — concentrated in wealthier, highly educated households who could potentially afford to lose the bet, as well as households low-income with low financial literacy scores.

The middle-income groups seem to have given up all of this.

The question then is whether – as with marketing highly speculative and volatile stock or bond funds to retail investors – regulators should finally have revised marketing rules, celebrity-approved advertising or easy access to these tokens on fintech banking apps or trading portals. requirements.

And now may be the time to act while the potential macro outages are still limited and before crypto becomes “too big to fail” too.

Goldman Sachs estimates that the global crypto market has fallen from about $1 trillion to $1.3 trillion since late last year, with US households exposed to a third of that decline.

Comparing this drop to total US household wealth, which stands at $150 trillion, the company estimated that the 20% drop in its stock over the same period would have a much greater impact.

But for Deutsche Bank analyst Marion Labore, the betting is already done. Reducing the speculative excesses of some of the more fringe coins is likely to dampen the appeal for many people to appear and for tokens that threaten to compete with existing currencies, the hammer will fall harder.

“Many historical examples point to the power of regulators to maintain financial stability,” she wrote. “Regulations come sooner rather than later”.

Chart: Bitcoin, Ether vs. S&P500 – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwejnbvo/Three.PNG

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(The author is Financial and Markets Editor-in-Chief at Reuters News. All opinions expressed here are his own).

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