According to a new study published by the Bank for International Settlements (BIS), cryptocurrencies have failed to reduce financial hazards in less developed economies but have amplified them.
The Consultative Group of Directors of Financial Stability (CGDFS) published a new report on cryptocurrencies on August 22 titled “Financial stability risks from crypto assets in emerging market economies.”
BIS member central banks from Argentina, Brazil, Canada, Chile, Colombia, Mexico, and the United States conducted the CGDFS investigation. The document highlighted that the views conveyed are those of the authors and “not necessarily those of the BIS.”
According to the study’s authors, cryptocurrencies such as Bitcoin have the “illusory appeal” of being a fast fix for emerging market financial problems.
“They have been promoted as low-cost payment solutions, alternatives for accessing the financial system, and substitutes for national currencies in countries with high inflation or high exchange rate volatility,” the study explains.
As cryptocurrencies have purportedly increased the financial stability risks of emerging markets, the report notes that authorities have various policy options to address these risks, including outright bans, containment, and regulation.
Nonetheless, there are risks if central banks and regulators react ” excessively prohibitively,” according to the paper, adding that such policies could drive crypto activities underground. The authors continued:
“While crypto-related activities have not fulfilled their stated goals to date, the technology could still be applied in various constructive ways. Creating a regulatory framework to channel innovation into such socially useful directions will remain a key challenge in future.”
Crypto ETFs
The central banks identified Bitcoin exchange-traded funds (ETFs) as one of emerging markets’ most significant potential market risks. These products can lower the entrance barriers for “less sophisticated investors” and increase their exposure.
The study’s authors cited as one of the hazards a scenario in which Bitcoin ETF investors “own no crypto assets but still face substantial losses when the price of Bitcoin falls.
Additionally, crypto futures-based ETFs “may increase price volatility and amplify risks if they hold a substantial portion of the futures market,” according to the document.
In addition, it needs to be clarified precisely which emerging markets are referred to in the study, as many jurisdictions in this category, such as China and Pakistan, have extremely restrictive crypto regulations. Similarly, whether the circumstance differs in more developed nations is still being determined.
The study indicates that the BIS is cautious about adopting Bitcoin and other cryptocurrencies, though it does not inherently reflect the BIS’s views. \
In another report published in July, the international financial institution reiterated its extreme skepticism regarding cryptocurrencies, citing issues such as the alleged irreversibility of smart contracts and the instability of stablecoins.
The central bank, on the other hand, praised central bank digital currencies. “By supporting the future monetary system, CBDCs would serve as the basis for future innovations,” the authority wrote.
