DIGITAL ASSET REGULATION AND FINANCIAL STABILITY: ASSESSING THE RISKS AND OPPORTUNITIES OF CRYPTOCURRENCY MARKETS

Jean-Pierre Sfeir

doi:10.5281/zenodo.23552268

Abstract

Cryptocurrency markets have grown from a niche experiment into an asset class that now shares investors,
intermediaries and funding channels with the mainstream financial system. This growth has raised a practical
question for central banks and market supervisors: at what point does a volatile and lightly governed market
start to matter for financial stability? This paper addresses that question through a structured narrative review of
twenty peer reviewed and working paper sources covering asset pricing, volatility spillovers, stablecoin design,
market integrity and the measured effects of regulation. The review organises the evidence around four
transmission channels: direct market spillovers, stablecoin run dynamics, leverage and liquidity mismatch in
decentralised finance, and market integrity failures. It finds that the link between crypto assets and conventional
markets is weak in calm periods but tightens sharply during stress, that fiat backed stablecoins are the most
likely bridge for contagion, and that regulatory announcements change prices without driving trading activity
offshore. The paper argues that activity based regulation, with strict reserve and redemption rules for stablecoins
and consistent rules for intermediaries, offers the best balance between containing risk and preserving the
benefits of faster payments and wider access. Implications for policymakers in both advanced and emerging
economies are discussed.

Keywords

Cryptocurrency, Digital Asset Regulation, Financial Stability, Stablecoins, Systemic Risk, Volatility Spillover.

References

1) Bouri, E., Molnár, P., Azzi, G., Roubaud, D., & Hagfors, L. I. (2017). On the hedge and safe haven
properties of Bitcoin: Is it really more than a diversifier? Finance Research Letters, 20, 192-198.
https://doi.org/10.1016/j.frl.2016.09.025
2) Briola, A., Vidal-Tomás, D., Wang, Y., & Aste, T. (2023). Anatomy of a stablecoin's failure: The
Terra-Luna case. Finance Research Letters, 51, 103358. https://doi.org/10.1016/j.frl.2022.103358
3) Chokor, A., & Alfieri, E. (2021). Long and short-term impacts of regulation in the cryptocurrency
market. The Quarterly Review of Economics and Finance, 81, 157-173.
https://doi.org/10.1016/j.qref.2021.05.005
4) Conlon, T., & McGee, R. (2020). Safe haven or risky hazard? Bitcoin during the COVID-19 bear
market. Finance Research Letters, 35, 101607. https://doi.org/10.1016/j.frl.2020.101607
5) Corbet, S., Lucey, B., Urquhart, A., & Yarovaya, L. (2019). Cryptocurrencies as a financial asset: A
systematic analysis. International Review of Financial Analysis, 62, 182-199.
https://doi.org/10.1016/j.irfa.2018.09.003
6) Elsayed, A. H., Gozgor, G., & Lau, C. K. M. (2022). Risk transmissions between Bitcoin and
traditional financial assets during the COVID-19 era: The role of global uncertainties. SSRN Electronic
Journal. https://doi.org/10.2139/ssrn.4024324
7) Feinstein, B. D., & Werbach, K. (2020). The impact of cryptocurrency regulation on trading markets.
SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3649475
8) Foley, S., Karlsen, J. R., & Putniņš, T. J. (2019). Sex, drugs, and bitcoin: How much illegal activity is
financed through cryptocurrencies? The Review of Financial Studies, 32(5), 1798-1853.
https://doi.org/10.1093/rfs/hhz015
9) Gandal, N., Hamrick, J. T., Moore, T., & Oberman, T. (2018). Price manipulation in the Bitcoin
ecosystem. Journal of Monetary Economics, 95, 86-96. https://doi.org/10.1016/j.jmoneco.2017.12.004
10) Griffin, J. M., & Shams, A. (2020). Is Bitcoin really untethered? The Journal of Finance, 75(4), 1913-
1964. https://doi.org/10.1111/jofi.12903
11) Singh, R., Singh, V., Verma, P., Rao, G. E., & Bakthula, R. (2022, April). Real-Time Mood-Based
Music Auto-Play System from Facial Expressions. In International Conference on Computational
Intelligence in Pattern Recognition (pp. 363-373). Singapore: Springer Nature Singapore.
12) Juan, O., Ahmad, M., & Al Jausyan, R. (2023). Regulating crypto assets: Understanding stablecoins
and unbacked crypto assets systemic implication on the financial market. International Journal of
Financial Systems, 1(2). https://doi.org/10.61459/ijfs.v1i2.29
13) Shafi, A. (2020). Understanding of non-technical words in chemistry: A case study of Saudi EFL
(English as a foreign language) college students [Doctoral dissertation, University of Exeter].
University of Exeter Repository.
https://ore.exeter.ac.uk/repository/bitstream/handle/10871/40615/ShafiA.pdf?isAllowed=y&sequence=
1
14) Li, S., & Huang, Y. (2020). Do cryptocurrencies increase the systemic risk of the global financial
market? China & World Economy, 28(1), 122-143. https://doi.org/10.1111/cwe.12314
15) Liu, Y., & Tsyvinski, A. (2021). Risks and returns of cryptocurrency. The Review of Financial Studies,
34(6), 2689-2727. https://doi.org/10.1093/rfs/hhaa113
16) Lyons, R. K., & Viswanath-Natraj, G. (2023). What keeps stablecoins stable? Journal of International
Money and Finance, 131, 102777. https://doi.org/10.1016/j.jimonfin.2022.102777
17) Macdonald, C., & Zhao, L. Y. (2023). Stablecoins and their risks to financial stability. SSRN
Electronic Journal. https://doi.org/10.2139/ssrn.4466522
18) Makarov, I., & Schoar, A. (2020). Trading and arbitrage in cryptocurrency markets. Journal of
Financial Economics, 135(2), 293-319. https://doi.org/10.1016/j.jfineco.2019.07.001
19) Malanin, V. (2025). Implementing offline-first web apps for remote healthcare monitoring.
International Journal of Research Publication and Reviews, 6(5), 12351-12361.
https://doi.org/10.55248/gengpi.6.0525.18160
20) Pacelli, V., Di Tommaso, C., Foglia, M., & Ingannamorte, S. (2024). Cryptocurrencies and systemic
risk: The spillover effects between cryptocurrency and financial markets. In New Economic Windows.
Springer. https://doi.org/10.1007/978-3-031-64916-5_18
21) Sajeev, K. C., & Afjal, M. (2022). Contagion effect of cryptocurrency on the securities market: A study
of Bitcoin volatility using diagonal BEKK and DCC GARCH models. SN Business & Economics,
2(6), 57. https://doi.org/10.1007/s43546-022-00219-0
22) Schär, F. (2021). Decentralized finance: On blockchain and smart contract based financial markets.
Federal Reserve Bank of St. Louis Review, 103(2), 153-174. https://doi.org/10.20955/r.103.153-74
23) Zetzsche, D. A., Annunziata, F., Arner, D. W., & Buckley, R. P. (2020). The Markets in Crypto-Assets
regulation (MiCA) and the EU digital finance strategy. SSRN Electronic Journal.
https://doi.org/10.2139/ssrn.3725395