Few regions of the world have embraced crypto assets as much as Asia, where individual and institutional investors from India to Vietnam and Thailand are among the leading adopters. This raises the crucial question of how much cryptocurrency has been incorporated into Asia’s financial system.
Digitalization can support the shift to an ecologically friendly payment system and promote financial inclusion, but cryptocurrencies can be risky for financial stability.
Cryptocurrency appeared to be apart from the banking system before the outbreak. The lack of correlation between Bitcoin and other assets and Asian equities markets helped allay fears about financial stability.
But cryptocurrency trading flourished as more people stayed home and got government assistance. Low-interest rates and simple financing requirements also contributed. In just a year and a half, the market value of all crypto assets worldwide increased 20-fold, reaching $3 trillion in December. Then, it fell to less than $1 trillion in June due to hikes in central bank interest rates intended to control inflation.
Fast-Moving FinTech Presents Regulatory Challenges
Technology can occasionally advance at an astonishing rate. The globe is experiencing significant advancements in FinTech, or innovation in financial activity.
The disruption of essential financial services by fintech for banks forces them to innovate to stay competitive. Customers may have easier access to superior services as a result.
These developments also increase the stakes for regulators and supervisors because, even though most FinTech companies are currently tiny, they may scale up much more quickly across riskier clientele and industry categories than conventional lenders.
We discuss these system-wide risks in our most recent Global Financial Stability Report. This combination of rapid growth and the growing importance of FinTech financial services for the operation of financial intermediation can cause them.
In their domestic markets, digital banks are becoming more systemically significant. Also referred to as neobanks, they are more vulnerable to risks associated with consumer lending than their conventional counterparts because such lending typically has fewer protections against losses due to its propensity to be less collateralized. Additionally, their exposure includes greater risk-taking in their securities portfolio and more significant liquidity hazards (specifically, liquid assets held by neobanks relative to their deposits tend to be lower than what would be held by traditional banks).
The risk management systems and general resilience of most neobanks have not been tested during a recession, which presents a problem for regulators due to these characteristics.
FinTech companies not only take on additional risks themselves but also put pressure on long-standing competitors in the market. Take the United States as an example, where FinTech mortgage originators adopt a rapid expansion approach when home financing is increasing, such as during a pandemic. Traditional banks’ profitability has been severely harmed by competitive pressure from FinTech companies, and this trend is expected to continue.