Can crypto assets pose a risk to the traditional financial system and make it unstable?

When it comes to making easy payments, crypto assets do have the potential and can offer new opportunities. However, setting aside the opportunities, there are certain challenges and risks associated with cryptocurrencies as well. Cryptocurrency trading in Kolkata and across the globe is steadily rising in popularity. However, cryptocurrencies do have the potential to positively drive financial institutions to a new era of financial transactions.

Crypto assets – What is so interesting about these virtual assets?

As depicted by the experts specializing in Blockchain development in India, crypto assets, also termed as virtual assets, are digital assets that can work as medium of exchange of financial transactions. There are different forms of crypto assets - cryptocurrencies, utility coins, and security tokens which are decentralized digital currencies working on blockchain technology.

With technological advancements, these assets have come a long way and hold the potential to replace traditional finance. However, being a global phenomenon, these types of assets can be a bit confusing on multiple levels like – how individual assets differ from one another and what is the role of every digital asset or major participants in the virtual finance ecosystem. The good news is that with such a potential these assets like bitcoin, altcoins, cryptocurrencies and tokens are very much capable of creating a whole new finance ecosystem.

How could cryptos pose a threat to traditional finance?

Cryptocurrencies are such digital assets that use cryptographic techniques to generate a medium of exchange in the financial transactions. With virtual assets becoming popular by the day, Cryptocurrency exchange development is also on the rise, with many traders and investors opening accounts every day. Cryptocurrency is secured or encrypted using cryptography, which helps secure financial transactions and verify the transfer of assets as well.

It is now evident to the fact that digital assets or cryptocurrencies have successfully surpassed $2 trillion and a popular cryptocurrency like Bitcoin can pose a threat to the traditional finance system. The crypto market is swelling and there are growing fears of harming the ordinary investors who have little or no knowledge of fraud or market manipulation. Cryptocurrencies can pose risk to the traditional finances in different aspects like operational stability, financial integrity, environmental aspects, and investor protection.

Crypto assets could pose risk to traditional finance as both are interconnected, and the surge effects may be transmitted to traditional economies. However, there are three primary risks –

·         Lack of underlying claim: There are no underlying claims associated with cryptocurrencies and lack fundamental value as well. This is the reason why cryptos experience extreme price movements by being volatile, which also exposes the holders to potential losses.

·    Unregulated finance: Being an unregulated form of finance, cryptocurrencies cannot fulfil the characteristics of payments and financial instruments. The holder does not even profit from holding crypto-assets, as there is no legal protection associated with regulated traditional finance.

·         Money laundering risk: With DLT or distributed ledger technology into play, there is heightened money laundering and terror financing risks associated with cryptocurrencies. For not being regulated it becomes difficult to address operational risks like cybersecurity threats, and the risk of fraud. 

Blockchain development in India is still at an evolutionary stage, but cryptocurrencies cannot be considered a threat to the financial system. However, integration and unprecedented growth of digital assets is worrisome as the volatility of cryptos might affect traditional finance markets.