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 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 rated by the agency.
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 from central banks, and the risk of them infiltrating the traditional financial systems, exposing them to a possible bubble burst, is raising eyebrows at regulators.
S&P views cryptocurrencies as a speculative instrument that would have an insignificant effect on global financial stability if its value were to collapse.
If the value of cryptocurrencies dropped substantially, it is likely retail investors would endure most of the impact, while rated banks would not feel the hit since they are largely insulated thanks to their limited direct and indirect exposures and cautious approach so far.
The future of cryptocurrencies will depend on the coordinated approach of global regulators and policymakers, but we note that their underpinning technology could strengthen operations, notably with regards to money transfers and financial market infrastructure companies