by Calculated Risk on 11/25/2024 09:50:00 AM

An interesting paper from researchers at the NY Fed: The Financial Stability Implications of Digital Assets Here is the overview:

• This article considers the potential vulnerabilities associated with the digital asset ecosystem, adapting the Federal Reserve’s framework for assessing financial stability risks in the traditional financial system.

• In particular, it examines the potential channels through which stress in crypto­-asset markets could be transmitted to the traditional financial system and ultimately disrupt the real economy.

• The authors argue that, to date, the contribution of digital assets to systemic risk has been limited, given that the digital ecosystem is relatively small and not a major provider of financing and payment services to the real economy.

• However, the observed fragility in the digital asset space is associated with vulnerabilities that could destabilize the broader financial system if the digital ecosystem becomes more systemic
emphasis added

Many years ago, after the financial crisis, I warned "Each new generation of ... wizards figures out a new way to turn lead into gold, and to become wealthy while damaging the financial system. Some of these wizards are probably perfecting their financial alchemy right now."