Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271999 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10355
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
The phenomenal growth of cryptocurrencies raises important questions about their footprint on the financial system. What role are traditional financial intermediaries playing in cryptocurrency markets and what drives their engagement? Are new nodes emerging? We help answer these questions by leveraging a novel global supervisory database of banks' cryptocurrency exposures and by synthesising a range of complementary data sources for other types of institutions. We find that major banks' exposures currently remain at very modest levels. Across countries, higher innovation capacity, more advanced economic development, and greater financial inclusion are associated with a higher likelihood of banks taking on cryptocurrency exposures. We show that substantial activity is concentrated in lightly regulated crypto exchanges. This "shadow crypto financial system" serves both retail and institutional clients, such as dedicated investment funds. An uneven regulatory treatment across banks and crypto exchanges and significant data gaps suggest that a proactive, holistic and forward-looking approach to regulating and overseeing cryptocurrency markets is needed. It should focus on ensuring a more level playing field with regard to financial services provided by established financial institutions and intermediaries in the emerging crypto shadow financial system by introducing more stringent regulatory and supervisory oversight for the latter.
Subjects: 
cryptocurrencies
decentralised finance
digital currencies
financial regulation
financial supervision
exchange stablecoin
Bitcoin
Ethereum
JEL: 
E42
G12
G21
G23
G28
O33
Document Type: 
Working Paper
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