• 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.”