It may seem like something that doesn’t affect the real world, but did you know that over 60% of crypto investments are funded by conventional borrowing? That’s a lot of unsecured debt which could go bad, compromising many people’s finances and having a knock-on effect for all kinds of businesses.
People are losing big on crypto right now. If they’ve funded their investments with borrowing, they could find themselves in real financial difficulty. At the very least, their spending power and ability to keep up payments on other debts may be severely compromised. That’s why it pays for all creditors to be aware of the crypto market and its risks for the wider economy.
What is cryptocurrency?
Often shortened to just ‘crypto’, cryptocurrency is a digital or virtual currency that’s secured by cryptography. That means it’s almost totally safe from being counterfeited. What’s more, because they’re not issued by any central bank, cryptocurrencies are also theoretically immune to government interference or manipulation.
With no need for a third-party intermediary, money transfers in cryptocurrencies are faster and cheaper than traditional bank and credit card transfers. However, that doesn’t mean crypto is the perfect solution to replace the pound just yet. There are several downsides to these virtual cash deposits, including price volatility and high energy consumption for ‘mining’ (or creating) new currency, not to mention the potential for cryptocurrencies to be used in criminal activities.
Recent market developments
Unless you’re an investor in cryptocurrency, it’s easy to shrug off the recent demise of FTX, one of the leading players in the market. It’s also easy to ignore the consequent crash in the value of people’s crypto holdings.
However, being blasé about crypto would be misguided. It appears that much of the money invested is financed by personal debt. Research by KIS Finance in 2021 showed that 64% of cryptocurrency investors had used one or more credit facilities to fund their investment, including credit cards, overdrafts and personal loans.
We’re not talking about chicken feed. According to recent figures from Coinmarketcap.com, there’s a total of over £800 billion invested in cryptocurrency. If the volatility in cryptocurrency markets continues, or there’s a long-term downturn, huge numbers of people could be facing financial difficulty, loan default or, in some cases, bankruptcy. That’s a significant level of risk for creditors.
Why does all this matter if you’re not involved in the crypto chain?
The high gearing of many cryptocurrency investors is a major concern for lenders such as banks and credit card companies. However, there could also be a knock-on effect on the wider commercial world. Cryptocurrency investors are also consumers of products and services. They could have other debt liabilities with all kinds of businesses and organisations, from utilities providers to independent schools.
With so much added pressure on the finances of so many people, the message to all creditors is ‘be prepared’. You need to be mindful of the negative effect that cryptocurrency investments may be having on the financial health of some of your customers. So, it’s more important than ever to follow best practice in your credit management. That means carefully assessing the creditworthiness of new customers and keeping a tight rein on the credit accounts of existing clients. It also means robust credit control to ensure that debts you’re owed are prioritised and settled promptly.
If you have limited internal time and resources, it might be worth outsourcing collections or credit management to a professional debt collection agency. Putting things in their safe hands will give you peace of mind and enable you to focus on the important task of running your business.
What does the Bank of England say?
Sir Jon Cunliffe, the Bank of England’s Deputy Governor, has expressed serious concerns about the stability of the cryptocurrency market.
“Part of this is because, its foundation is completely unbacked instruments of extreme volatility that can swing wildly in value,” he said in a recent speech at Warwick Business School. “But part is also because the crypto institutions at the centre of much of the system exist in largely unregulated space and are very prone to the risks that regulation in the conventional financial sector is designed to avoid.”
The Bank’s official position is that crypto markets do not yet have the scale or close links to traditional markets to threaten wider financial stability. However, it is calling for more regulation to protect consumers.
Proactive debt collection and credit management from a trusted partner
At Redwood Collections, we provide a comprehensive range of debt collection and credit management services. Acting at all times with professionalism and integrity, we can proactively chase overdue payments on your behalf, as well as providing valuable support and advice. Our aim is simple: to help your business Grow Stronger.
