Should the Federal Reserve issue digital currencies? -Part 5
Unlike other systems, open systems use cryptography to make the cost of verifying a token’s authenticity very low, and track the creation of these tokens, which can prevent counterfeiting.
Evaluation of the Impact of Digital Assets on Financial Stability -Part 6
Aynsley Moore
Oct 12, 2021
3. Leverage risk
Like any financial asset, if a position involves leverage, the position in a cryptoasset may bring greater risks to the holder and creditors. Leverage may amplify the transmission of volatility and risk because it shows that investors can absorb fewer capital losses from market volatility, and these losses will then spread to other entities.
Information about the role of leverage in the cryptoasset market is incomplete. According to a recent survey, nearly 20% of cryptoasset owners borrow to finance their purchases. In principle, this debt can exist in the form of credit cards or home equity loans, or in the form of cryptoassets as collateral to purchase retail Bitcoin and other cryptoassets. Similarly, in some jurisdictions, investors in cryptoassets can also trade on margin, with leverage between 2.5 and 100 times. On these platforms, the total amount of leveraged contracts and the actual use of leverage are usually not reported, and it is not clear which entities are providing financing.
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