Crypto threatens financial stability says BoE banker

Jon Cunliffe, the Bank of England’s deputy governor for financial stability has recently given a speech where he tackled the question of whether or not, “the world of ‘crypto finance’ poses risks to financial stability.” Why and how does it do that?

Cunliffe pointed out that cryptoassets have grown by roughly 200% in 2021 ($2.3 tn), and from $16 billion just five years ago. The global financial system is worth $250 trillion, to give some context. He also mentioned that the sub-prime debt market was worth around $1.2 trillion in 2008, just before the financial crisis.

His point in using this comparison was that because the crypto industry is growing rapidly and beginning to connect to the traditional financial system, and there are leveraged players emerging in a mostly unregulated space, systemic risks, while limited now, could grow very quickly.

Referring back to 2008, he reminded his audience that in the case of the sub-prime market, “the knock-on effects of a price collapse in a relatively small market was amplified and reverberated through an un-resilient financial system causing huge and persistent economic damage.” We all remember the effects.

He called for financial stability regulators to take notice, to think very carefully about what could happen and whether they, or other regulatory authorities, needed to act. However, he cautioned against over-reaction. As he said, “We should not classify new approaches as ‘dangerous’ simply because they are different.”

Indeed, he said that innovation and technology, plus new players, could tackle longstanding frictions and inefficiencies and reduce barriers to entry, and that in the past they have been key to driving improvement and to increasing resilience in financial services.

Then, what started as a speech that may have sounded gloomy to the crypto markets, Cunliffe made an important and positive statement. He said, “Crypto technologies offer a prospect of radical improvements in financial services.” But he did add a caveat, “However, while the financial stability risks are still limited, their current applications are now a financial stability concern for a number of reasons.”

He then analysed the crypto market, breaking it down into unbacked cryptoassets used primarily as speculative investments and backed cryptoassets intended for use as a means of payment, pointing out that unbacked assets make up 95% of the market, and includes Bitcoin. His concern is that the main use of unbacked cryptoassets is for speculative investment and that fewer holders now say they see them as a gamble and more see them as an alternative or complement to mainstream investment. His greatest fear appears to be that while he doesn’t believe a collapse in the crypto retail investor sector would bring about instability, the large financial institutions with exposure to crypto are another matter, such as the many crypto hedge funds. He described one scenario: “For example, a severe fall in the value of cryptoassets could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.”

Ultimately, Cunliffe called for faster action on regulating the market to manage risk, saying, “Although crypto finance operates in novel ways, well-designed standards and regulation could and should enable risks to be managed in the crypto world as they are managed in the world of traditional finance.”

While he sounds positive, as ever the demand is to bring crypto more in line with traditional finance, the very thing that caused the creation of crypto in the first place, due to ‘tradition’s’ failings.

Neobanks are challenging the big crypto exchanges

As neobanks like N26 and Revolut, as well as payment providers such as PayPal, Square and CashApp move into cryptocurrencies, does this pose a threat to the cryptocurrency exchanges?

Investing has changed, according to Francis Bignell at Fintech Times. He says, “Due to the pandemic, younger, tech savvy individuals working from home, spending more time online, and flush with stimulus money found solace in investing,” and adds, “As a generation known for not accepting things as they are, simply because it’s how they’ve always been, they relentlessly refused to approach investing in the “traditional way.” 

What we now have is a rising class of retail investors who value investments by the social currency and utility (e.g. meme stocks, NFTs and crypto). The result of these trends raises a number of questions about the future of investing. 

Bignell points out: “In early 2021, Reddit users battled with Wall Street by skyrocketing GameStop’s stock share. This, along with the rise in meme stocks, show that Wall Street is no longer dictating what is worth investing in and what isn’t anymore.” You could say a new approach to valuation is rising, one that’s based on the social worth of a company versus traditional notions of profitability.

Crypto exchanges challenged by new investing environment

Public.com is an evolving investment platform. It will shortly support trades in bitcoin, bitcoin cash, ether, ethereum classic, dogecoin, litecoin, stellar, zcash, cardano and dash, and is being tailored to a growing, young demographic looking to trade in meme stocks. Public offers zero-commission stock trading and has an added social media component that could leverage the emerging meme stock-fuelled retail investment frenzy, as exemplified by Shiba Inu’s 24,459,593.97% rise in the last year, and Dogecoin’s 8,765.17% increase in value.

Robinhood is also about to challenge the crypto exchanges by introducing crypto wallets for its users to trade with other wallets. Robinhood users had previously been able to buy and sell a few cryptocurrencies, but had been unable to send those coins to external wallets or receive them from elsewhere. When this is implemented, it will offer Robinhood access to the space dominated by Coinbase and others.

US based fintech, MoneyLion, has announced it is adding crypto trading to its all-in-one financial services app, joining the ranks of N26 and Volt. It will introduce buying and selling capabilities for bitcoin and ether, according to its CEO, Dee Choubey. Choubey told CNBC, ““It’s a very important first step if we think that the future of fintech is DeFi. We will have created a segment of the population and have exposed them to DeFi, so when it becomes more ubiquitous, they’re fully prepared to take advantage of it.”

Maurizio Raffone Chief Financial Officer at Credify Pte. Ltd, explained how investing in a neobank would differ from a crypto exchange: “Neobanks’ typical client may not be a savvy crypto investor but is interested in having some exposure to the asset class and may not be bothered about NFTs, altcoins or stablecoins and so just having some degree of exposure to BTC or ETH would suffice. On the other hand, crypto exchanges do not really focus on providing any traditional financial service support but do generally provide a greater investment choice and with more sophisticated investment techniques.” 

What does that mean for banking and financial institutions? It means that they must have some form of crypto or digital currency feature or be left behind as their customers become more digitally aware.

The Pandora Papers expose a rotten system of privilege

Whilst there are many good, economic reasons why cryptocurrency and blockchain have grown since 2009, there is a more emotional reason underpinning it as well, and that is that people in power cannot be trusted. Just last week, we the people were given another file of documents – The Pandora Papers – which underlines why that distrust exists, and is growing.

The Pandora Papers consist of around 12 million leaked documents from law firms and other organisations worldwide. The documents unmask the previously unknown owners of 29,000 offshore companies hiding billions of dollars in assets from taxation or oversight. A good number of these ‘unknowns’ are actually terribly well known public figures in their countries, and some are global figures, such as singer Shakira.

David Z Morris in his thoughtful opinion piece for Coindesk, labels it “aggressive tax avoidance,” adding, “in some cases hidden funds seem linked to outright corruption, much of this activity is nominally legal – but the very existence of such structures almost guarantees they’re being used for deeply harmful ends well beyond dodging taxes.”

It is also estimated that a mind-boggling $32 trillion in assets are hidden in offshore tax havens, which is a figure “roughly 15 times the total value of all cryptocurrency in existence.”  Some of that money in reality belongs to the citizens of the 200 countries named in the papers, and should have been used for public infrastructure and services.

Morris rightly suggests that the Pandora revelations make a mockery of governments’ focus on cryptocurrency as a conduit for money laundering, tax evasion and criminal activity. Yes, there are some who may argue that crypto makes it easier for the average person to ‘enjoy’ the same tax evasion benefits as the users of offshore tax havens, but Morris says, not only is this a race to the bottom for crypto, it is a “false equivalency”, because “what world leaders have accomplished through offshore entities and shady banks simply can’t be replicated by average people using crypto.”

That’s because crypto cannot match the secrecy offered by offshore entities. And that is because the use of tax havens “is part of a much larger and more complex system of shadow influence that relies on institutional political power and generational wealth.” Furthermore, they are not just used for tax avoidance, they can hide “state-sponsored drug trafficking, murder and anti-democratic violence,” Morris points out.

Ultimately, what the Pandora Papers show us is something we’ve always known, but perhaps needed to be reminded of: the global banking system provides secrecy to only the wealthiest and most powerful. Cryptocurrency may not be the complete answer to this elitism, but it does explain some of the motivation behind crypto adoption, and that is the desire to escape a system that is rotten to the core.

Kraken issues warning about Bitcoin ATMs

A recent report from Kraken Security Labs reports that a “large number” of Bitcoin ATMs are vulnerable to hacking. They say it is because the admin have never changed the default admin QR code.

The ATMS in question are those in the General Bytes BATMTwo ATM range, which the report says have “multiple hardware and software vulnerabilities.” The Kraken blog post added, “Multiple attack vectors were found through the default administrative QR code, the Android operating software, the ATM management system and even the hardware case of the machine.”

All a wannabe hacker needs to do, according to Kraken, is find the administrative QR code, then they can approach any of the ATMs and compromise it. The blog also looks at BATMtwo’s lack of secure boot mechanisms, as well as “critical vulnerabilities” in the ATM’s management system.

The Kraken team also discovered that they were able to gain full access to the Android operating system behind the BATMTwo ATM by simply attaching a USB keyboard to the machine, and warned that “anyone” could “install applications, copy files or conduct other malicious activities.”

To be fair to General Bytes, they have reportedly already alerted ATM owners to the vulnerabilities, due to the fact that Kraken alerted them about the vulnerabilities back in April 2021. In a statement General Bytes said, “Kraken Security Labs reported the vulnerabilities to General Bytes on April 20, 2021, they released patches to their backend system (CAS) and alerted their customers, but full fixes for some of the issues may still require hardware revisions.”

General Bytes ATMs have 6391 ATMs installed worldwide. The majority are in the USA and Canada (5,300), with Europe only having 824 of their machines. The Czech-based company has around 22.7% of the crypto ATM market, which is significant.

As we know there are people in this world who will try any type of scam, and Bitcoin ATMs have featured previously. In Toronto, the police alerted the public to a series of “double-spending” transactions at crypto ATMs in the city that fetched $150,000 worth of funds over a 10-day period. This is a scam where the perpetrator cancels a transaction before the ATM can confirm it, but as the machine has already dispensed the money anyway, the scammer gets to keep it.

As with any ATM, users need to be ever vigilant, because the more crypto ATMs there are, the harder they will work on trying to rob them, and in ways we haven’t even seen yet.