The Financial Stability Implications of Digital Assets

Financial activity associated with digital assets has grown rapidly, raising concerns about financial stability risks. This article presents an overview of these risks, adapting the Federal Reserve’s framework for monitoring financial stability in the traditional financial system. The overview reveals that the observed fragility of digital assets is associated with several financial vulnerabilities: valuation pressures of crypto assets, funding risk in most crypto sectors, the widespread use of leverage, and a highly interconnected crypto ecosystem. However, to date, these vulnerabilities have made a limited contribution to systemic risk given that the digital ecosystem is relatively small, is not a major provider of financial services, and exhibits limited interconnections with the traditional financial system.