If Crypto is Incorporated into Australia’s Financial System, We Will Be Lucky to Avoid Contagious Collapse
-
Loading... - Aarni Couri
- 06 Jan 2025
- 34 Views
- 0 Like
- 0 Comment
As a former principal adviser to then-treasurer Wayne Swan, Jim Chalmers witnessed firsthand the impact of the global financial crisis (GFC) on the Australian economy and financial system. Australia managed to avoid the worst of the GFC largely due to its cautious approach to financial innovations, particularly exotic derivatives, which had wreaked havoc on financial institutions in the U.S. and U.K. This cautiousness allowed for timely fiscal stimulus measures, both domestically and in China, which helped stave off the deep recessions experienced elsewhere.
However, recent comments from Chalmers suggest that Australia’s financial system may not be insulated from an impending crisis, particularly with the anticipated changes in U.S. policy under President-elect Donald Trump. Chalmers indicated that the separation between traditional financial systems and the cryptocurrency sector may soon diminish, raising concerns about the potential ramifications for Australia.
Much of the apprehension surrounding the integration of cryptocurrency into the financial system centers on its notorious volatility. While commodity prices are also volatile, they have been traded in financial markets for over a century, and financial markets are designed to manage such risks. The more pressing issue with cryptocurrencies is their intrinsic value—or lack thereof.
Cryptocurrencies, such as Bitcoin, are essentially certificates of complex mathematical calculations with no inherent utility. Unlike traditional assets, which derive their value from usefulness, desirability, or government backing (as with fiat currency), cryptocurrencies lack these foundational attributes. Unless the Trump administration decides to recognize Bitcoin as equivalent to U.S. dollars, its value remains tenuous.
The crux of the concern is that if a significant number of people decide that cryptocurrencies are worthless, their value could plummet rapidly. As holders rush to cash out, prices would fall further, creating a downward spiral with no stable floor. Critics of cryptocurrency have long argued its worthlessness, yet the market has seen dramatic price increases since its inception in 2009. This phenomenon can be likened to the Ponzi scheme operated by Bernie Madoff, which thrived for years before collapsing during the GFC.
In previous downturns, the crypto market's losses primarily affected individual investors. However, the next few years may see traditional financial institutions exposed to hundreds of billions, if not trillions, in crypto-related assets. Mortgages may increasingly be secured against crypto collateral, and loans to crypto exchanges, previously restricted, could become commonplace, heightening the risk of a systemic collapse.
A potential trigger for a crash could be the failure of a major stablecoin, which is designed to maintain a fixed value against the U.S. dollar. Tether, the leading stablecoin, claims to hold over $100 billion in assets but has provided only vague accounts of its reserves. Chalmers has mentioned plans for legislation to regulate “payment stablecoins,” but regulating a global entity like Tether poses significant challenges.
Australia's previous success in navigating the GFC was a combination of prudent management and a bit of luck, with Jim Chalmers playing a key role in that process. If cryptocurrencies are allowed to take a prominent position in the financial system, Australia may find itself relying solely on luck to avert a future disaster. The potential for a contagious collapse looms large, and careful consideration is needed to protect the integrity of the financial system in the face of emerging risks associated with cryptocurrency.
