Macquarie's Warning: "The Next Financial Crisis Will Originate from Cryptocurrency"

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Bank of Korea Foreign Exchange Operations Department International Financial Market Trends

'Possibility of Financial Market Instability Triggered by Crypto Assets'

[Asia Economy Reporter Kim Eunbyeol] A warning has been issued that the next financial crisis may originate from the crypto asset market. With money continuously flowing worldwide, investment funds are already pouring into the crypto asset market, and the global financial markets are intricately interconnected, raising concerns that a problem similar to the 2008 financial crisis could emerge someday. Currently, in South Korea, crypto assets refer to digital coins such as Bitcoin.

According to the International Financial Market Trends report (May 24?28) from the Bank of Korea Foreign Exchange Operations Department on the 2nd, Victor Siebetz, an analyst at Macquarie Group, recently appeared on a Bloomberg podcast and warned, "The next financial crisis will originate from the crypto asset (cryptocurrency) market." He stated, "The world is strongly interconnected and leverage has increased," adding, "It is similar to the 2007 mortgage market, which was a precursor to the financial crisis." While leveraged investment itself is not the problem, companies like Tesla are buying crypto assets, financial institutions hold stocks of those companies, and other countries hold bonds of those financial institutions, creating close interconnections that significantly increase risk. Analyst Siebetz said, "The market, inflated by leveraged trading, can be estimated to be worth $3 to $4 trillion," and "If a shock of the order of a trillion dollars occurs, it would be a shock to the financial system." At the end of last month, according to CoinMarketCap, the crypto asset market had grown to a scale of $1.5 trillion.

Bloomberg podcast host Joe Weisenthal also stated, "People invested in crypto assets declaring independence from the state, but ironically, it will be the state that rescues them." Analyst Siebetz explained, "The world is highly interconnected to the extent of causing a butterfly effect, and one asset group is purchased by another asset group," adding, "When a shock occurs in the digital world, it can affect mortgages in places like Tajikistan and Los Angeles, but the problem is that this situation cannot be detected in advance and assets cannot be managed separately."

Central banks worldwide, including the Federal Reserve (Fed), have acknowledged that traditional economic theories no longer apply and have accepted that the linkage between employment and inflation (Phillips curve) does not hold. However, their reluctance to address asset markets has been cited as a factor exacerbating the crisis. Analyst Siebetz said, "Bitcoin, Dogecoin, and non-fungible tokens (NFTs) are still not on the computer screens of traditional economists."

In particular, the risks of stablecoins are considered greater. Stablecoins are private digital currencies linked to existing fiat currencies to reduce price volatility. Because they have collateral assets and promise convertibility with fiat currencies, their high connectivity could increase systemic risk. JP Morgan pointed out that stablecoins are increasingly linked to the financial market, being issued based on collateral such as cash and commercial paper (CP). The Bank of Korea has also stated that regulation and supervision are necessary for stablecoins. A Bank of Korea official said, "The increase in services providing leveraged investment in crypto assets such as decentralized finance (DeFi) is also a problem due to increased volatility," but added, "It seems that the recently surged market is gradually cooling down."

The Bank of Korea uses the term "crypto asset" as agreed upon by the G20 (Group of Twenty). It means assets secured using cryptographic techniques. Bank of Korea Governor Lee Ju-yeol recently warned at a press conference following the Monetary Policy Committee meeting, "The price volatility of the crypto asset market could negatively impact financial stability and the stability of the financial system," adding, "Household loss risks may increase, and the risk of related loan defaults transferring to financial institutions cannot be ruled out." However, the government uses the term "virtual asset" in the Act on Reporting and Using Specified Financial Transaction Information (Special Financial Transactions Information Act). This term, designated by the Financial Action Task Force (FATF), has a broader meaning than crypto asset.