Issue link: https://digital.shearman.com/i/1479657
Emergence and Trajectory (cont.) There are a number of benefits to the use of cryptocurrencies in day-to-day transactions. For example, their peer-to-peer nature means that, in theory, intermediary / processing fees can be eliminated (or significantly reduced), and transactions completed almost instantaneously. Transactions are also secure, because the underpinning distributed ledger technology (DLT) prevents people from spending coins they do not own or undoing transactions. However, cryptoassets also come with risk and remain highly volatile as shown recently by the influx of digital asset companies freezing assets, seeking to restructure liabilities and/or filing for insolvency / bankruptcy proceedings. Notable examples include (i) Voyager Digital, which at its height boasted 3.5m users and $5.9bn in assets, freezing customer funds at the beginning of July and a few days later filing for bankruptcy protection in New York; (ii) ThreeArrows Capital, which as recently as March managed c.$10 billion in assets (making it one of the most prominent crypto hedge funds in the world) filing for bankruptcy in June; and (iii) Celsius Network, one of the world's largest cryptocurrency lenders, recently filing for bankruptcy and listing its liabilities and assets between $1bn and $10bn, highlighting the volatility of cryptoasset value. These cases swiftly follow the failure of the TerraUSD stablecoin and the Tether stablecoin (which underpins much of the trading in cryptocurrencies), which fell below their $1 peg and resulted in investors facing losses of $1.3 trillion, as estimated by the European Central Bank in Q2 2022. Due to the absence of intermediaries, cryptocurrencies also lack many of the protections that come with institutional involvement and regulatory oversight. For example, when someone loses access to a traditional bank account (e.g., loses their bank card, internet banking password, etc.), a bank can generally restore access once the customer's identity is confirmed. By contrast, where someone loses access to their crypto wallet, the wallet (and the funds held within) can be lost forever. While some of this risk may be mitigated by using a wallet hosted by a third party (e.g., an exchange), there may still be a risk of loss if those third parties become insolvent (since there is no deposit protection equivalent for cryptocurrencies) or are targeted by cyberattacks or theft. Cryptoassets & Insolvency 5 The Financial Policy Committee of the British central bank, the Bank of England, has said that "extreme volatility" in crypto prices in recent months underscores vulnerabilities in the crypto market. Citing a $2tn reduction in the total market capitalization of crypto assets to $1tn, the Bank of England has stressed the need for tougher law enforcement and regulation for the crypto sector. While noting that the volatility in the crypto market is not currently posing a risk to the stability of the U.K. financial system, the Bank of England cautioned that systemic risks would emerge if crypto activity and its interconnectedness with the traditional financial system continues to grow. In June of this year, the president of the European Central Bank, Christine Lagarde, similarly said: "Crypto assets and decentralized finance (defi) have the potential to pose real risks to financial stability."