China’s argument with cryptocurrencies got quite an assist from index giant MSCI.
Crypto enthusiasts like to think bitcoin and other private mediums of exchange exist outside the conventional financial system. So do, it often seems, officials from Washington to Tokyo dragging their feet on regulatory responses.
A new analysis from MSCI, though, suggests these lackadaisical approaches may underestimate the risks the crypto universe poses to the underlying financial system it purports to be replacing–or at least avoiding. The problem is the way crypto risks are “creeping” into more than $7 trillion worth of market capitalization in the old-school analog stock market.
“Institutional investors may have more exposure to cryptocurrency risk than they realize,” says the report’s lead author Harlan Tufford. “Twelve years since bitcoin’s creation, cryptocurrencies today are a part of business for at least 52 companies covered by MSCI ESG Research.”
These cryptocurrency-exposed companies, Tufford says, include 26 constituents of MSCI’s flagship ACWI Index. This means that whether you’re a bitcoin skeptic like Warren Buffett, Nouriel Roubini and their ilk or a true believer, a collapse in what U.S. Securities and Exchange Commission head Gary Gensler calls “the Wild West” could slam portfolios everywhere.
Which gets us back to China’s crackdown on all things crypto. Granted, confusion reigns in Beijing, where the country’s leadership seems to be throwing crime tape over China’s biggest internet companies and innovators to remind Big Tech who’s boss. The crypto world is no exception. Last month, they closed the last regulatory loopholes for mining and trading. Effectively, crypto assets are finished in Asia’s biggest economy.
The “confusion” part relates to what companies that invested big in the crypto space do now. Also, when—and how—might the digital currency being perfected at People’s Bank of China headquarters might fill the void. There’s talk that an e-yuan might be ready for limited use in February when the Beijing Winter Olympics begins. But really, who knows?
Part of Beijing’s crackdowns is about the Chinese Communist Party retaining firm control over the financial system. Not surprisingly, much of the early drama surrounded Jack Ma, the global face of China’s tech ambitions.
Chinese leaders must have enjoyed the sight of Ma taking Alibaba Group public in New York in 2014. That initial public offering, then history’s biggest, announced China’s coming tech dominance. Beijing blanched, however, in late 2020 when Ma’s fintech shop, Ant Group, was about to pull off a huge $37 billion IPO.
Jack Ma (C) rings a bell to open trading on the floor at the New York Stock Exchange in New York on … [+] September 19, 2014.
JEWEL SAMAD/AFP via Getty Images
Suddenly, they were reminded of how Facebook founder Mark Zuckerberg and his peers had essentially commandeered national power from Washington—the tail wagging a political dog slow to learn new digital-age tricks. Fearing a loss of financial control—and of mainland social media companies becoming too influential—the CCP empire struck back.
Welcome to the matrix in which crypto assets find themselves. In recent years, Beijing made it harder and harder for mainland millionaires and billionaires to visit Macau with steamer trunks full of yuan. Increased surveillance made it harder for officials to spirit their cash into property in Hong Kong and beyond.
Crypto currencies are, of course, the ultimate game changer in this regard. Hence the panic attacks in the halls of power as governments worry money launders, terrorists and tax cheats now have the ideal tool to do their worst.
Is China’s crypto ban prescient or needlessly draconian? Only time will tell. But the ways in which MSCI suggests troubles in crypto world could bleed into Wall Street and major bourses everywhere should be a wakeup call for investors and governments alike.
The last 22 months of Covid-19 haven’t only been unprecedented from an economic standpoint. This period pushed central banks even more aggressively into the direction of excessive easing. It had government loosening national balance sheets already stretched by post-Lehman Brothers crisis stimulus a decade earlier. Japan alone spent 40% of gross domestic product in 2020, or $2.2 trillion, trying to support growth.
Now, on top of monetary and fiscal excesses, supply chain troubles are fanning inflation. And raising risks of overheating that causes chaos in bond markets and shakes equities. This the context one needs to consider while digesting MCSI’s estimate that $7.1 trillion of global market cap—almost tripled France’s GDP—is at risk if crypto assets stumble.
Could top exchanges like Coinbase be in harm’s way if crypto crashes? What about well-known bitcoin holders like Tesla or those dabbling in crypto services like JPMorgan Chase & Co.?
Do corporate board members, many hired for successes decades ago, have the expertise to know how private currencies might blow up a business? How, then, do risk-management teams prepare? How do rating agencies factor in this brave new world few truly understand?
Either by design or accident, China may be less exposed to any crypto troubles to come.