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The Financial Stability Implications of Digital Assets

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Abstract

The value of assets in the digital ecosystem has grown rapidly amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. The digital asset ecosystem has recently proven itself to be highly fragile. However, adverse digital asset market shocks have had limited spillovers to the traditional financial system. Currently, the digital asset ecosystem does not provide significant financial services outside the ecosystem, and it exhibits limited interconnections with the traditional financial system. The paper describes emerging vulnerabilities that could present risks to financial stability in the future if the digital asset ecosystem becomes more systemic, including run risks among large stablecoins, valuation pressures in crypto-assets, fragilities of DeFi platforms, growing interconnectedness, and a general lack of regulation.

Suggested Citation

  • Pablo D. Azar & Garth Baughman & Francesca Carapella & Jacob Gerszten & Arazi Lubis & JP Perez-Sangimino & David E. Rappoport & Chiara Scotti & Nathan Swem & Alexandros Vardoulakis & Aurite Werman, 2022. "The Financial Stability Implications of Digital Assets," Staff Reports 1034, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:94863
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    Cited by:

    1. Marcin Pietrzak, 2023. "What can monetary policy tell us about Bitcoin?," Annals of Finance, Springer, vol. 19(4), pages 545-559, December.
    2. Dominik Metelski & Janusz Sobieraj, 2022. "Decentralized Finance (DeFi) Projects: A Study of Key Performance Indicators in Terms of DeFi Protocols’ Valuations," IJFS, MDPI, vol. 10(4), pages 1-23, November.

    More about this item

    Keywords

    digital assets; stablecoins; DeFi; financial stability; financial vulnerabilities; systemic risk;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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