Staff Reports
The Financial Stability Implications of Digital Assets
Number 1034
September 2022

JEL classification: G20, G21, G28

Authors: Pablo Azar, Garth Baughman, Francesca Carapella, Jacob Gerszten, Arazi Lubis, JP Perez-Sangimino, David E. Rappoport, Chiara Scotti, Nathan Swem, Alexandros Vardoulakis, and Aurite Werman

The value of assets in the digital ecosystem has grown rapidly amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. The digital asset ecosystem has recently proven itself to be highly fragile. However, adverse digital asset market shocks have had limited spillovers to the traditional financial system. Currently, the digital asset ecosystem does not provide significant financial services outside the ecosystem, and it exhibits limited interconnections with the traditional financial system. The paper describes emerging vulnerabilities that could present risks to financial stability in the future if the digital asset ecosystem becomes more systemic, including run risks among large stablecoins, valuation pressures in crypto-assets, fragilities of DeFi platforms, growing interconnectedness, and a general lack of regulation.

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Author Disclosure Statement(s)
Pablo D. Azar
I want to disclose that I own

1. Profits interests in Algorand Inc. and affiliated entities valued at more than $10,000
2. Less than $10,000 worth of Ripple and Monero in a Binance account

Garth Baughman
I have nothing to disclose related to the work titled “The Financial Stability Implications of Digital Assets.”

Francesca Carapella
Francesca Carapella declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Jacob Gerszten
I declare that I do not have any relevant or material financial interests that relate to the research described in this paper.

Arazi Lubis
I have nothing to disclose.

JP Perez-Sangimino
I, Juan Pablo Perez-Sangimino, declare that I have no relevant or material financial interests that relate to the research described in The Financial Stability Implications of Digital Assets.

David E. Rappoport
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Chiara Scotti
The author, Chiara Scotti, declares that she has no relevant or material financial interests that relate to the research described in this paper.

Nathan Swem
I have nothing to disclose.

Alexandros Vardoulakis
I have nothing to disclose.

Aurite Werman
I have no relevant investments to disclose.
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