The rise of crypto on Wall Street could end up triggering another financial crisis, global watchdog warns

• Wall Street's increasing appetite for crypto assets could risk sparking a financial crisis, global regulators warned.
• The Financial Stability Board said 'ongoing vigilance' of institutions such as big banks and hedge funds is needed.

Wall Street institutions' growing connections to crypto markets could threaten financial stability and cause a credit crunch-style financial crisis, global regulators have warned.

The Financial Stability Board said "ongoing vigilance" of institutional investors such as big banks and hedge funds is needed as they deepen their involvement in the $1.9 trillion crypto market.

"If the current trajectory of growth in scale and interconnectedness of crypto-assets to these institutions were to continue, this could have implications for global financial stability," the FSB said in a report published Wednesday.

Morgan Stanley last March became the first of the six biggest US banks to reveal plans to offer its wealth management clients access to bitcoin funds. It said at the time its clients had demanded exposure to the leading cryptocurrency.

JPMorgan followed in its footsteps in July, when the bank told its financial advisors they could take orders from wealth management customers to buy and sell crypto products. It also cited demand.

The FSB was concerned the volatility in cryptocurrency markets — even though crypto makes up just a fraction of global assets — could feed through as digital and traditional finance become more interconnected.

"If financial institutions continue to become more involved in crypto-asset markets, this could affect their balance sheets and liquidity in unexpected ways," it said.

The regulator compared the risk from a crypto event to the credit crunch that sparked the 2008 financial crisis.

"As in the case of the US subprime mortgage crisis, a small amount of known exposure does not necessarily mean a small amount of risk, particularly if there exists a lack of transparency and insufficient regulatory coverage," it said.

It noted that "systemically important" banks and other financial firms are increasingly keen to play a role in and gain exposure to crypto assets. Systemically important institutions are ones which, if they failed, could set off a financial crisis.

The overall value of the cryptocurrency market grew 3.5 times in 2021 to $2.6 trillion as institutional interest soared, the FSB noted. Its worth has fallen in the early months of 2022 as prices slumped.

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The FSB said it will examine the possible regulatory implications of cryptocurrencies such as bitcoin and ether, which are not backed by a stable traditional asset such as the dollar.

As part of this, it will explore what steps FSB member jurisdictions can take against associated financial stability threats.

"Efforts to enhance monitoring and to minimise regulatory arbitrage through further cooperation and information sharing are needed to keep pace with crypto-asset developments," the report stated.

The FSB consists of members from bodies like the Federal Reserve, the Bank of England, and the World Bank.