The volatile value of digital assets, especially crypto-assets, makes them risky options for investors. This inherent risk limits both their market size and the purposes for which they are used, thus reducing the possibility of systemic risk arising. But digital assets and the mainstream financial system are becoming increasingly interconnected, important and complex. Stablecoins, for example, are used more widely for payments because they are perceived as more dependable, but their link to fiat currency creates the risk of panicked investors cashing them out, similar to bank runs. The relative safety of central bank digital currency (CBDC) could make it too attractive, causing rapid shifts of deposits into CBDC in times of stress, resulting in faster and larger bank runs. Distributed ledger technology could simplify trading relationships, thus eliminating many margins and fees, but while this approach promotes efficiency, it could also weaken financial institutions that rely on revenue from these sources. The author recommends that regulators be aware of these risks and take precautions to mitigate them.
