The market capitalizations of cryptocurrencies and related economic activities have grown phenomenally in recent years. While the role of retail investors has received much attention, less is known about the role of financial intermediaries in this sector. How significant is the presence of traditional intermediaries such as banks and investment funds in crypto markets, and what motivates them to take on cryptocurrency exposures? And how important are novel intermediaries such as crypto exchanges?
Researchers from the Bank for International Settlements (BIS) gauge the significance of financial intermediaries in crypto markets, using a novel global supervisory database of banks’ cryptocurrency exposures and a range of additional data sources. They assess the factors that determine banks’ holdings of cryptocurrencies. In addition, they investigate the role played by novel crypto exchanges, and examine the cross-country drivers of institutionalization.
Findings
The potential for cryptocurrencies to scale up quickly calls for a comprehensive approach to assessing and mitigating risks, even though the interlinkages between crypto markets and mainstream finance have remained limited. The exposures of major banks to cryptocurrency exposures are currently still very modest, amounting to less than $200 million in 2020.
Researchers find that banks are more likely to hold cryptocurrencies when country indicators are high for greater innovation capacity, more advanced economic development, and financial inclusion. They also show that substantial activity is concentrated in lightly regulated crypto exchanges. This “shadow crypto financial system” serves both retail and institutional clients, such as dedicated investment funds.