Cryptocurrencies are often seen as a “safe haven” for investors, with many referring to Bitcoin as “digital gold”. However, a group of Oxford University researchers are now warning that greater crypto trading could pose a risk to the financial system in times of crisis.
Researchers suggest crypto could be what holds off complete financial meltdown
This warning came in a recent blog post from the Oxford University Law Faculty. The post, titled “How Is the Market for Cryptocurrencies Affected by the Coronavirus and Why Should We Care”, argues that cryptocurrency regulation is necessary to prevent a meltdown of the financial system.
Traditional financial markets are bearing the brunt of the COVID-19 coronavirus pandemic’s disastrous economic fallout. However, this could spread to the cryptocurrency market as well, according to the researchers. Currently, the crypto markets are holding steady – with recent data showing Americans buying crypto with their stimulus checks.
Although a previous paper from the Oxford University researchers, “How Crisis Affects Crypto: Coronavirus as a Test Case” notes that each new COVID-19 case leads to an inflow of funds into the crypto market, this correlation is imperfect.
Crypto market becomes even more important during crises
In fact, the researchers find that the crypto market’s surge is likely following an “inverse U” curve. As such, the crypto market could see initial price increases, and then decreases as the situation gets worse.
For example, the worsening pandemic could prompt investors to pull out of all markets completely – including the crypto market. What’s more, the researchers also suggest that investors may regain trust in traditional financial markets if government policies are effective.
The researchers note that the cryptocurrency market, which they call the “step brother” to traditional financial markets, is hugely important. The crypto market offers a “valuable alternative during crises”, which allows “capital to flow to (otherwise constrained) firms” using tokens.
Regulations are important – but could be harmful
With that said, however, the researchers suggest that the crypto market is in dire need of regulations. If the crypto market crashes, they argue, this could be even more disastrous than a normal financial market meltdown.
This is because a collapse of the crypto market could cut off these valuable alternative financial routes. As such, the researchers suggest regulation is not beneficial if it’s “regulation for regulation’s sake”.
Rather, they argue that regulation is “time-sensitive”. Consequently, regulation that “works at one point may become pointless (or harmful) later”. This is an apt summary of the crypto market that many lawmakers tend to misunderstand.
Although the cryptomarket may require regulation to grow and flourish, it is important that the regulation doesn’t stifle innovation. This is important in general, but especially in crises – and even more so when traditional markets struggle.
Rasmus Pihl is a writer for Toshi Times by day and an avid follower of the blockchain industry by night. Rasmus holds a Bachelor’s Degree in Marketing from the Gothenburg School of Business, Economics, and Law and runs a Swedish marketing consulting firm. Moreover, when he isn’t writing for Toshi Times, traveling, working or changing the world in some other capacity, Rasmus is more than likely caught up in postgraduate studies.