A research paper from the Bank for International Settlements concludes that cryptoassets, touted as the future of finance, have not only failed to deliver on their promise, but are increasing financial risks in developing economies.
The BIS report showed that “cryptoassets have the illusory appeal of being a simple and quick solution to financial challenges” especially in emerging markets, but “they have so far not reduced financial risks in less developed economies but rather amplified them.”
The report examines what could happen if cryptocurrencies and traditional financial markets become more integrated in the future, focusing on the potential risks to financial stability as crypto assets should be evaluated “from a risk and regulatory perspective like all other assets.”
The risks are believed to be multifaceted, as vulnerabilities in digital assets stem from the nature, structure, composition and function of those markets.
The study argues that a potential way forward is for national authorities to collaborate to identify the data they need to effectively monitor the market “with a focus on identifying important points of contact with financial institutions and underlying market infrastructure.”
However, this comes with disclosure elements that conflict with the issue of anonymity which is the number one reason some people and entities turn to crypto assets.
The report’s guidelines for regulating and supervising crypto-asset markets include prohibition, containment and regulation.
Given the offshore and anonymous nature of digital asset markets, an outright ban may not be enforceable
BIS paper
Conversely, policymakers would lose these markets entirely, making these markets less transparent and predictable. Additionally, you will lose all potential innovation gains from crypto asset markets
BIS paper
Maintaining control over flows between traditional financial systems and crypto market assets, or containment, is believed to face similar hurdles such as blocking; Because “controlling money may not be feasible from a practical standpoint.”
The study argues that regulation brings different motivations across jurisdictions and adds the problem of data gaps, where disclosure again plays a large role.
Earlier this year, the EU’s financial services chief said the rest of the world should copy the EU’s rules for crypto assets to create a global approach that protects consumers and financial stability.
About two dozen central banks in emerging and developed economies are expected to have digital currencies in circulation by the end of the decade, according to a Bank for International Settlements survey published last month and conducted late last year.
