Tuesday, 17 September 2019

Crypto assets: developments and perspectives

In recent years, crypto-assets have increased in popularity, despite being volatile, speculative and not a currency.

Crypto-assets are a relatively recent phenomenon. Since they arrived on the scene approximately ten years ago, crypto-assets have increased in popularity, which has resulted in a growing number of trading platforms and an expanding variety of new crypto-assets.

By May 2019 there were more than 2,000 varieties of crypto-assets (although the vast majority of them are not used) with a total market capitalisation of approximately €230 billion. As can be seen from the chart below, crypto-assets are highly volatile and their combined value is small relative to the value of euro banknotes in circulation or other asset classes.

The market value of crypto-assets is equivalent, for instance, to Finnish GDP and corresponds to approximately 19% of the total value of euro banknotes and coins in circulation. The latter have steadily increased since their introduction in 2002, reaching a value of more than €1.2 trillion for banknotes and about €29 billion for coins at the end of April 2019.

The value of crypto-assets is also small compared to the big five digital technology firms (Facebook, Apple, Amazon, Netflix and Google – the FAANG index) at only 8% of their market capitalisation. Bitcoin represents approximately 55% of the total market capitalisation of crypto-assets (May 2019).

As a comparison, total issuance of electronic money in the euro area (excluding the Eurosystem) reached more than €9 billion in May 2018. In 2017 commercial banks accounted for approximately 70% of this electronic money issuance.

Crypto-assets are not currencies. They differ from money (including electronic money) and do not have legal status or a distinct legal framework, and they are unsupervised. They are highly speculative, and as such expose holders to the risk of large losses. One reason is that they do not represent an underlying claim against the issuer. The absence of any specific institution, such as a central bank, protecting the value of crypto-assets makes them unsuitable for use as a form of money. Moreover, the pronounced volatility of crypto-assets and their limited acceptance by merchants discourages their use as a store of value or means of payment and makes it difficult to use them as a unit of account.

Holders of crypto-assets may also be exposed to digital fraud and the theft or loss of private digital keys – used for accessing crypto-assets – all of which increases the risk of financial losses. It may also be difficult to identity counterparties in transactions, which poses a threat to financial transparency. On the other hand, the technology underlying crypto-assets, distributed ledger technology (DLT), seems to offer some advantages to users. It may reduce transaction costs and settlement times and it is borderless.


source: euro-area-statistics.com
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