Mike Dolan

LONDON (Reuters – Regardless of the broader economic or financial stability risks, 10% household exposure may be acceptable to loosely-regulated speculative punts which double or halve their value every six months.

This year, the top crypto ‘currencies’ like Ether, dropped between 40-50%, and there has been an earthquake within the parallel stablecoin’ universe of tokens that are supposed to act as links from regular financial services to the twilight of crypto finance, also known as ‘decentralised’ finance.

A typical year in finance’s nether regions? Some might argue that caveat emptor is a good idea.

The latest developments touched another nerve for central banks and governments who are concerned that they have allowed this system to get out of control without adequate oversight or transparency. They fear it will reach levels they can’t manage or stabilize.

G7 finance heads met in Germany last week to discuss crypto turmoil. They urged their Financial Stability Board to “promote the rapid development and implementation consistent and comprehensive regulation.”

Francois Villeroy de Galhau (French central bank chief) reinforced the message by emphasizing the importance of this week’s World Economic Forum in Davos. This forum raised the alarm about the risks associated with money laundering and investment protection, as well as the need to increase the urgency.

“It is an emergency matter now… Villeroy stated that he hoped this European regulation would be in place this year.

Although still relatively low compared to real estate and stocks or bonds, the U.S. Federal Reserve released two survey results this week that showed at least 10% of households across both countries have tried crypto investment in 2021.

One thousand adults were surveyed by the Fed in its annual Survey of Household Economics and Decisionmaking report. It showed a relatively grim picture of consumer financial health overall, even though it came before one of our worst years for a single year.

When asked to question cryptocurrency, 12% said they had invested in it during the last 12 months. It was used for payment and remittance purposes by less than 3 percent.

Although this may be a small percentage compared with the roughly 50% U.S. households who hold stock for savings or retirement, it’s likely to represent a significant portion of governments that see these tokens have little or no longer-term value and are worried about financial sharks consuming inexperienced savers.

If, according to some estimates, the majority of token-holders have arrived in the last year, and they are now underwater at levels greater than $30,000, damage limitation could be the first priority of governments and watchdogs.

Christine Lagarde (ECB chief) stated that Bitcoin and hundreds of lesser-known tokens are basically ‘worth nothing.

Graphic: Chart on crypto use from ECB household survey – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrnkexvm/One.PNG

Graphic: Chart on crypto from Fed household survey – https://fingfx.thomsonreuters.com/gfx/mkt/egvbkwjaxpq/Two.PNG b9febc7a-0299-4725-8764-77a8af66f78e1 cd5d8873-a53f-4833-bd8c-867bdb89c9f52

WORTHLESS?

For those people who believe it is all just high-octane fun, but only wealthy individuals can afford to make some losses in their marginal funds, the Fed survey revealed other disturbing details. Over half of crypto investors had an annual income exceeding $100,000, while almost three quarters earned below $50,000.

According to the ECB’s Consumer Expectation Survey (Fed findings), as much as 10% of households in euro zones now have crypto tokens.

The Fed estimated showed that it had a similar “U-shaped” curve in the income quintiles of the investors and in financial literacy. This was similar to how the Fed estimate looked. These were either concentrated in higher-income, highly-educated households, who may be able to afford to lose their punt, or in households with lower financial literacy.

The middle income group appears to have given up on the whole thing.

So, the question is whether regulators need to demand overhauls of marketing rules and celebrity-endorsed advertisements.

It is now that the macroeconomic potential fallout may still be minimal and crypto does not become too large to fail.

Goldman Sachs, NYSE:), estimates that crypto’s global market has dropped to about $1.3 trillion from late last year. U.S. households are exposed to a third of that drop.

If you compare that drop to the total US household net worth at $150 trillion, then it was not a significant drag and the 20% stock market decline would be much more detrimental.

However, Deutsche Bank The game has already ended according to Marion Laboure, an ETR analyst. It will be difficult to curb the excesses of speculators of certain marginal coins. The hammer is also likely to come down hard for tokens that could rival currencies.

She wrote that “many historical examples demonstrate the power regulatory bodies have to maintain financial stability.” Regulation will be here sooner than expected.

Graphic: Bitcoin, Ether vs – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwejnbvo/Three.PNG bada928d-b29d-4ff7-a2d9-a7dd2b9037d13

Other columns:

COLUMN-‘Mom & pop’ investors left high and dry in tech, crypto meltdown

COLUMN-Crypto Warnings Invoke U.S. Subprime Bust (2008) and All That

(The author serves as editor-at-large at Reuters News for markets and finance. These views are not his.

(by Mike Dolan, mike.dolan@thomsonreuters.com. Twitter (NYSE: ): @reutersMikeD