– Cryptocurrency can pose a threat in the long run – E24
Norges Bank will not give a general warning to Norwegians against investing in cryptocurrency, but believes that it is associated with risk.
In Norges Bank’s annual report on financial stability, cryptocurrency is highlighted as a potential risk to the financial system both globally and in Norway, but not in the near future.
– The prevalence and scope is currently quite modest in Norway, but we point to possible channels through which cryptocurrencies can have effects on the financial system and pose a threat to the financial system in the long run, says Deputy Governor Ida Wolden Bache to E24.
In the report, the central bank points out that institutional investors have shown increased interest in cryptocurrencies, and that international banks and other financial institutions are available for such investments, as well as offering customers crypto-related services.
However, Norges Bank is not familiar with Norwegian banks and other Norwegian financial undertakings have “significant exposure” to cryptocurrencies.
– If it increases in scope and if systemically important institutions and banks, for example, get increased exposure to cryptocurrencies, then you can get these ripple effects to the entire financial system, says Wolden Bache.
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Stable coins can become systemically important
Large falls in value, which can be both sudden and unpredictable, for example if the preconditions for the technology fail, are among the risks that the central bank points to.
This year I have been earning on bitcoin swinging between a bottom of around 29,000 dollars (251,000 kroner) to a peak of close to 69,000 dollars. In total, it circulates bitcoin for 1.241 trillion dollars, according to Coinmarketcap.
Wolden Bache also mentions the risks associated with such stable coins, which can become systemically important globally. This type of cryptocurrency, where Tether is the largest, is coins with a stable price, linked to a fast value, such as dollars, securities and / or other cryptocurrencies.
The development of stack coins has contributed to cryptocurrencies being used to a greater extent for payments, but there are still few transactions other than trading in cryptocurrencies, Norges Bank writes.
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Stackable coins that are hedged with securities can, in the event of uncertainty about the value of the cryptocurrency, be exposed to large-scale investors wanting to switch to another currency.
Then the underlying securities must be sold quickly in order to pay those who want to change. Such an urgent sale of securities can have systemic effects, Wolden Bache explains.
In the EU, it is working on a comprehensive regulatory framework for cryptocurrency that includes regulation of the offer of stack coins. The goal is to promote innovation, while at the same time protecting consumers and ensuring financial stability.
Small risk for Norway
Another risk associated with cryptocurrency concerns the security of the payment system. If cryptocurrencies are used for payments to a large enough extent, technical failure can have systemic effects.
In this field, there may therefore also be a need for separate regulations, the central bank points out.
Cryptocurrencies can also lead to less use of national currencies, which in turn can affect the ability to conduct monetary policy.
“This is first and foremost a challenge for countries with inefficient payment systems, a lack of confidence in the monetary system and unstable currencies. It is therefore considered a small risk for Norway in the foreseeable future “, the report states.
Norges Bank itself monitors developments on an ongoing basis and assesses the need for regulation. Regulatory initiatives internationally can counteract the development becoming a threat to financial stability.
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– Do you want to warn against investing in cryptocurrency?
– It is clear that investing in cryptocurrencies, when we see the large fluctuations in value, involves great risk. Values can fall sharply, the market can be manipulated and the technology behind it can fail. It also provides new arenas for fraud and other criminal activity, says the Deputy Governor.
– So it is important with regulation that protects consumers and that counteracts criminal use, she adds.
– So it will not give any general warning to Norwegian consumers against investing in cryptocurrency?
– We emphasize in our communication that investing in cryptocurrencies is associated with great risk.
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