The Financial Stability Implications of Digital Assets

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Economic Policy Review

The Financial Stability Implications of Digital Assets

Volume 30, Number 2
November 2024

JEL classification: E42, G01, G13, G20, G21, G28

Authors: Pablo Azar, Garth Baughman, Francesca Carapella, Jacob Gerszten, Arazi Lubis, JP Perez-Sangimino, David E. Rappoport, Chiara Scotti, Nathan Swem, Alexandros Vardoulakis, and Aurite Werman

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.

Full Article

Author Disclosure Statement(s)

Pablo D. Azar
I want to disclose that I own
1. Profits interests in Algorand Inc. and affiliated entities valued at more than $10,000
2. Less than $10,000 worth of Ripple and Monero in a Binance account

Garth Baughman
I have nothing to disclose related to the work titled “The Financial Stability Implications of Digital Assets.”

Francesca Carapella
Francesca Carapella declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Jacob Gerszten
I declare that I do not have any relevant or material financial interests that relate to the research described in this paper.

Arazi Lubis
I have nothing to disclose.

JP Perez-Sangimino
I, Juan Pablo Perez-Sangimino, declare that I have no relevant or material financial interests that relate to the research described in The Financial Stability Implications of Digital Assets.

David E. Rappoport
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Chiara Scotti
The author, Chiara Scotti, declares that she has no relevant or material financial interests that relate to the research described in this paper.

Nathan Swem
I have nothing to disclose.

Alexandros Vardoulakis
I have nothing to disclose.

Aurite Werman
I have no relevant investments to disclose.

Suggested Citation:
Azar, Pablo D., Garth Baughman, Francesca Carapella, Jacob Gerszten, Arazi Lubis, JP Perez-Sangimino, David E. Rappoport, Chiara Scotti, Nathan Swem, Alexandros P. Vardoulakis, and Aurite Werman. 2024. “The Financial Stability Implications of Digital Assets.” Federal Reserve Bank of New York Economic Policy Review 30, no. 2, November. https://doi.org/10.59576/epr.30.2.1-48

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