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ICOs not a current risk to financial stability, says Carney

Initial coin offerings (ICOs) do not pose a current risk to financial stability, Mark Carney has said in a letter to senior officials at the world's biggest economies.20 Mar 2018

Carney, the governor of the Bank of England, said that view had been reached by the Financial Stability Board (FSB) following "a review of the financial stability risks posed by the rapid growth of crypto-assets".

Carney is chair of the FSB, a prominent body that monitors for and makes recommendations to address vulnerabilities affecting the global financial system, and which coordinates financial regulation across the 'group of 20' (G20) major global economies.

In his letter to G20 finance ministers and central bank governors (8-page / 250KB PDF), Carney said: "The FSB’s initial assessment is that crypto-assets do not pose risks to global financial stability at this time. This is in part because they are small relative to the financial system."

"Even at their recent peak, their combined global market value was less than 1% of global GDP. In comparison, just prior to the global financial crisis, the notional value of credit default swaps was 100% of global GDP. Their small size, and the fact that they are not substitutes for currency and with very limited use for real economy and financial transactions, has meant the linkages to the rest of the financial system are limited."

Carney acknowledged, though, that the market "continues to evolve rapidly" and that the FSB's view could change if crypto-assets become "significantly more widely used or interconnected with the core of the regulated financial system".

"For example, wider use and greater interconnectedness could, if it occurred without material improvements in conduct, market integrity and cyber resilience, pose financial stability risks through confidence effects," he said.

The FSB will "identify metrics for enhanced monitoring of the financial stability risks posed by crypto-assets" to help with "timely identification of emerging financial stability risks", Carney said.

Carney also highlighted issues concerning "consumer and investor protection" which he said crypto-assets raise. He said work to address those issues across international bodies is "warranted".

ICOs are an increasingly popular way for businesses to raise money. Typically, businesses will develop a digital token, such as their own proprietary virtual currency, and look to sell those tokens to investors in a bid to raise capital in return for existing cryptocurrency, such as Bitcoin, Ether or Ripple rather than fiat currency such as dollars, euros or pounds. The trade of these tokens is recorded using blockchain.

Investors can in most cases sell on those tokens for profit on certain peer-to-peer exchange platforms should the value of the tokens increase. They are sometimes further incentivised into buying the tokens by being given the opportunity to share in profits generated from the business ventures that benefit from their investment. 

A number of regulators around the world have set out their view on the extent to which ICOs are subject to regulation.

Litigation expert Jennifer Craven of Pinsent Masons, who specialises in civil fraud matters, said: "ICOs present new issues and challenges for our clients relating to buying and selling technology-based currency, disclosure, regulation, money laundering, payment systems and fraud prevention. On the fraud point alone, the risks of fraud and loss following investment in an ICO is heightened by the likelihood that most ICO projects are at an early stage and by the fact that tokens and cryptocurrency values can be volatile and subject to rapid changes."

"It is encouraging, however, that the potential wider use of crypto assets may actually bring about improvements in fraud prevention, though the message remains that businesses and investors should continue to proceed with caution," she said.

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