NEW YORK--(BUSINESS WIRE)--#Bitcoin--In a previous commentary, we explored the benefits and costs of El Salvador's bet on Bitcoin. This commentary discusses some of the underlying challenges driving the recent market sell-off, the broader stability implications of the rapid growth in cryptocurrencies, and the uneasy relationship between sovereigns and the cryptocurrency market, all from a sovereign credit perspective. We also consider the need for regulatory oversight and the impact government policies are likely to have on the development of the sector. While there are a variety of technological innovations related to some individual cryptocurrencies that go beyond the scope of this commentary, we focus on questions of aggregate supply and demand and the use of cryptocurrency as a medium of exchange.
Key Highlights:
- Rapid growth in cryptocurrencies is a key factor undermining the stability of the asset class. An astronomical growth rate in substitutable cryptocurrencies points to a gradual debauching of this type of asset.
- A more formal regulatory framework may be a necessity for the survival of this asset class, but we see limited motivation - or trust - for government regulators and the industry to cooperate in this way.
- Governments will need to continue monitoring exposure to cryptocurrencies as a potential financial stability risk, and take appropriate regulatory actions.
“We see cryptocurrency use and exposure as a potential risk to sovereign governments and financial institutions,” said Thomas Torgerson, Co-Head of Sovereign Ratings at DBRS Morningstar. “Unless governments create the conditions for widespread acceptance of one defined group of cryptocurrencies, or a particular cryptocurrency offers a truly innovative and less replicable rationale for widespread adoption, price volatility will likely remain a feature of the market.”
To read the full report, click here: https://www.dbrsmorningstar.com/research/399727/sovereigns-and-cryptocurrencies-mutual-tolerance-and-suspicion
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