Among hardcore cryptoasset enthusiasts, there is arguably no greater insult than to be accused of spreading “FUD” (fear, uncertainty and doubt) about a token or project. According to Wikipedia, FUD is “a disinformation strategy used in sales, marketing, public relations, politics, cults, and propaganda. FUD is generally a strategy to influence perception by disseminating negative and dubious or false information and a manifestation of the appeal to fear.”

Given the massive surge in the value of many cryptoassets, investors in the space have generally learned to ignore negative stories and retain their original conviction in their investments. However, as last year’s stories about potential manipulation in the bitcoin market and the surge of ill-conceived Ethereum ICOs has proved, it can be just as dangerous to ignore cynical headlines as it is to panic over every minor criticism.

So what are some genuine sources of fear, uncertainty and doubt for crypto investors today?

There is no doubt that digital assets still face plenty of headwinds in the coming months and years (some of which we outlined in our previous newsletter), but with the value of many cryptoassets still down 80% or more from last year’s peaks, many of the legitimate concerns have already been priced into the market. As billionaire investor Charlie Munger is fond of saying when faced with a difficult problem, “Invert, always invert.” By flipping the question around, we can ask instead:

So what are some genuine sources of fear, uncertainty and doubt for investors in traditional assets today?

A close look at our current global financial system reveals plenty of areas for concern. More than a decade after the most recent Global Financial Crisis, it’s hard to point to any major changes that make a recurrence significantly less likely. Indeed, billionaire businessman Bill Gates recently made headlines after claiming another global financial crisis was now “a certainty.”

As we see it, there are three major areas of the global financial system that carry at least as much risk now as they did a decade ago:

1. Banks’ Token Reform Efforts Fail to Address Underlying Issues

In an effort to close the proverbial barn door after the horses have bolted, major international banks have addressed some of the flashpoints that contributed to the Great Financial Crisis. Thanks to a series of banking reforms, the top 10 US banks now hold nearly 10% of their assets as equity (up from 5.7% before the crisis), reducing leverage throughout the system. In addition, the big banks have reduced their reliance on fickle short-term borrowing sources to fund operations.

That said, many of the key issues that exacerbated the Great Financial Crisis remain. In the words of the IMF’s Global Financial Stability Report, “Banks have increased their capital and liquidity buffers since the crisis, but they remain exposed to highly indebted companies, households, and sovereigns; to their holdings of opaque and illiquid assets; or to their use of foreign currency funding.”

In addition, the IMF warned that the “the system of cross-border support mechanisms — such as central bank swap lines — has been undermined.” As the Federal Reserve notes, “These arrangements have helped to ease strains in financial markets and mitigate their effects on economic conditions. The swap lines support financial stability and serve as a prudent liquidity backstop.” The global trend toward populism and nationalism in recent years has made these critical tools less reliable, raising the risk of an isolated financing issue turning into a broader economic problem.

Despite token efforts to ameliorate the interconnectedness of the “too-big-to-fail” banks, the top five US financial institutions continue to control nearly half of the entire system’s assets:

Source: FDIC, New York Times

Of course, this analysis discusses only the publicly visible assets and liabilities of these financial institutions, not the operations of the opaque “shadow banking” system, which analysts estimate represents $70 trillion in off-balance-sheet loans and derivatives. A recent study conducted by Stanford Business School concluded that shadow banks have seen their market share of mortgage lending nearly triple since the Great Financial Crisis, with larger gains “among less creditworthy borrowers” and in “markets where traditional banks faced more regulatory constraints.” In the event of another crisis, taxpayers may again be called on to bail these monstrosities out or risk the entire financial system grinding to a halt.

Perhaps most importantly though, nothing has fundamentally changed with the operations and philosophies of large financial institutions. A few of the most egregious actors received fines, but no major bank executives were jailed for malfeasance; in fact, some of the CEOs at the epicenter of the meltdown, such as JPMorgan’s Jamie Dimon, remain in their leadership positions to this day. These politically-connected titans exercise significant influence over lawmakers, watering down new regulations and ensuring that they can continue operations unencumbered.

2. Sovereign Debt Levels Have Ballooned

While many citizens and businesses have reined in their use of debt since the Great Financial Crisis, government debt loads have ballooned. In aggregate, global sovereign debt has surged by 60% in the decade since the financial crisis to reach a record high of $182 trillion, with most of that growth coming from developed economies. The IMF notes that that, “The sequence of aftershocks and policy responses that followed the Lehman bankruptcy has led to a world economy in which the median general government debt-GDP ratio stands at 52%, up from 36% before the crisis.”

With debt levels on the rise, countries must devote an ever-increasing proportion their funds merely to cover the interest payments, reducing the amount they can spend on other initiatives. In addition, elevated debt loads make countries more vulnerable to destabilizing economic shocks, such as rising interest rates. With fiscal deficits across the developed world still elevated, global sovereign debt loads will continue to rise for the foreseeable future.

3. Monetary Policy Ammo is Running Low

In response to the Great Financial Crisis a decade ago, central banks relied initially relied on their standard monetary policy toolkit, namely by lowering interest rates. The Federal Reserve, for example, cut its primary interest rate from 5.25% down to just above 0.00% in just 18 months from mid-2007 to December 2009; when even those aggressive cuts failed to support the economy, the central bank embarked on a series of Quantitative Easing programs, eventually expanding its balance sheet holdings from less than $1 trillion to over $4.5 trillion. The Bank of England, European Central Bank, Swiss National Bank, and Bank of Japan have all embarked on similarly unprecedented paths in recent years, leaving their balance sheets bloated to several multiples of the size they were before the crisis.

Optimists will argue that these extraordinary measures supported the global economy and allowed it to resume its long-term growth trend. Be that as it may, it will still take years if not decades for central banks to normalize interest rates and unwind their asset purchases. In the words of IMF Deputy Managing Director David Lipton, “The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be . . . [and] less prepared than in the last [crisis in 2008].”

In other words, monetary policy authorities are running low on ammo to soften the blow from the next economic contraction, whenever that may be. Therefore, the next run-of-the-mill economic recession could metastasize and linger, raising the risk of another crisis.

We’ll leave it up to our readers to determine whether these concerns about the global banking system, sovereign debt loads, and still-extraordinary monetary policy represent legitimate risks to the functioning of the global economy or merely unfounded FUD. From our perspective, the advent of a transparent, non-correlated, global asset class could not have come at a better time given the current risks in the global financial system. Perhaps necessity truly is the mother of all inventions.