Cryptocurrencies are now gaining more acceptance globally. This situation seems to have disturbed the Bank for International Settlements (BIS). The BIS warns emerging economies of the financial stability risks associated with the adoption of cryptocurrencies.
BIS: Cryptocurrencies will make financial risks worse!
A recent report by the Bank for International Settlements (BIS) raises concerns about the attractiveness of crypto assets in emerging market economies (EMs). As you follow on Kriptokoin.com, cryptocurrencies are advocated as economic payment solutions, gateways to the financial system, and even alternatives to national currencies in countries struggling with high inflation or exchange rate volatility. However, the BIS suggests that crypto assets will worsen rather than alleviate financial risks in these economies. In this context, the Report underlines the following:
There are serious concerns about the ability of emerging market economies to monitor crypto-asset markets and assess financial stability risks from cryptocurrencies.
BIS member central banks contributed to the study
The report assesses the situation, taking into account risk and regulatory issues. Accordingly, he argues that these assets should be studied just like traditional assets. The BIS obtained the findings through extensive collaborative efforts initiated by BIS member central banks in the Americas under the Financial Stability Directors Advisory Group (CGDFS). These countries include Argentina, Brazil, Canada and the USA. The central banks of these countries joined the effort, while the BIS’s Americas Office led the way.
What are the multiple risks for cryptocurrencies?
Going into detail, the BIS report identifies multiple risks associated with cryptoassets. For example, liquidity risk is heightened by security vulnerabilities such as centralized trading on major exchanges, volatile cryptocurrency reserves, susceptibility to investor runs, and operational constraints associated with the “trilemma of scalability.”
The study also addresses market risks arising from volatility in the price of cryptocurrencies and lack of transparency. The direct market risk is attributed to the holding of crypto assets such as Bitcoin. Credit risks also come to the fore, with concerns about weak governance, limited investor protection and excessive leverage used by some players in the space. Another noteworthy point is the risk of banks exiting intermediation. A significant shift from bank deposits to privately issued cryptocurrencies could disrupt banks’ credit facilitation.
A balanced approach is important!
In particular, the report highlights the importance of a balanced approach to regulation. Because he states that it is possible for direct bans or restrictive regulations to push these activities underground. This is likely to make it more difficult to influence the industry’s responsible stakeholders. New innovations should not be seen as “risky” simply because they differ from traditional systems. Instead, the report advocates leveraging technology and innovation to improve financial systems.
The BIS encourages local regulators to consider selective bans, limitation and regulation of certain cryptoassets. It recommends establishing clear regulatory powers that distinguish between “activity-based and asset-based regulation”.
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