Cryptocurrencies won’t disrupt financial markets for now, S&P report says

2018-02-19 17:45 - Kyle Venktess, Fin24
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Johannesburg - Cryptocurrencies might not disrupt financial markets just yet, according to ratings agency Standard and Poor's.

S&P said that it believes that cryptocurrencies would need some regulation and guidance before they have a major impact on the financial markets, according to a report titled The Future Of Banking: Cryptocurrencies Will Need Some Rules To Change The Game, published on Monday. 

Cryptocurrencies have attracted significant attention from the market over the past 12 months because of its ledger software blockchain. 

In recent years blockchain has drawn interest from traditional establishments within the financial sector because of its potential to track transactions securely. 

Blockchain is managed through a peer-to-peer network and can be used to track other assets such as property, records, events, personal identities and of course cryptocurrencies.  

“If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability, and cost of financial transactions. The financial market infrastructure segment might also see benefit from cryptocurrencies and blockchain through the launch of new income-generating products, such as futures or exchanges based on cryptocurrencies, or the replacement of current practices by new ones based on blockchain,” S&P said.

Cryptocurrencies themselves have gained popularity because of their spike in value and decentralisation, making them independent from central banks.

Cryptocurrencies' risk infiltrating the traditional financial systems, exposing them to a possible bubble burst, is raising eyebrows at regulators.

S&P said that it believed that the characteristics of a cryptocurrency in its current version make it more like a speculative instrument that, if its market value were to collapse, would not disrupt global financial stability.

"For now, a meaningful drop in cryptocurrencies' market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate," said Mohamed Damak, S&P  Financial Institutions Sector Lead.

At this stage, S&P said that retail investors would be the first to bear the brunt in the event of a collapse in cryptocurrencies' market value. 

It also said in the report that it expected rated banks to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited.

If cryptocurrencies become an asset class, the impact on financial services firms will be more gradual, the report added.

"We believe that the future success of cryptocurrencies will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants' confidence in these instruments," Damak said. 

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