Financial markets are abuzz with questions regarding the nature and viability of digital currencies. As far as rated financial institutions’ risk exposure is concerned, however, S&P Global Ratings believes that it is much ado about nothing. In our opinion, in its current version, a cryptocurrency is a speculative instrument, and a collapse in its 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.
Cryptocurrencies are digital currencies that use encryption techniques to regulate the generation of units of currency and verify the transfer of funds. They have attracted a significant amount of attention from the market over the past 12 months. Cryptocurrencies are independent of central banks, and the risk of them infiltrating the traditional financial systems, exposing them to a possible bubble burst, is raising eyebrows at regulators.
However, in spite of the difference in their scale of operations, it is imperative to know that Bitcoin, taking into account the upheavals, is worth almost $250 billion. That is worth more than 50% of the entire market cap of the Altcoins, taken together.
This raises questions about the nature of doubt one might have regarding the viability of cryptocurrencies. However, some concerns are logical.
Cryptocurrencies, in their current version, have many characteristics of a speculative instrument. Hence, retail investors would be the first to bear the brunt in the event of a collapse in their market value.
If cryptocurrencies become an asset class, the impact on financial services firms will be more gradual. That is because there is a possibility that their future success will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants’ confidence in these instruments. More importantly, blockchain technology–which is what upholds cryptocurrencies, enabling the creation of a shared digital transaction ledger–could be a positive disrupter for various financial value-chains. 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 medium-term benefits 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.
Cryptocurrencies, despite all its deficiencies, is the tech of the future.