Cryptocurrencies, such as Bitcoin (BTC), have failed to reduce financial risks in emerging economies and have instead amplified them, according to a recent study published by the Bank for International Settlements (BIS). The study, titled “Financial stability risks from crypto assets in emerging market economies,” was conducted by BIS member central banks within the Consultative Group of Directors of Financial Stability (CGDFS), including those in Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States. The report highlights that the views expressed are those of the authors and not necessarily the views of the BIS.
The study argues that cryptocurrencies like Bitcoin present an “illusory appeal” as a quick fix to financial challenges in emerging markets. These digital assets have been marketed as low-cost payment solutions, alternatives for accessing the financial system, and substitutes for national currencies in countries with high inflation or exchange rate volatility. However, the authors of the study contend that cryptocurrencies have actually extended the financial stability risks faced by emerging economies.
In response to these risks, the report suggests that authorities have several policy options, ranging from outright bans to containment to regulation. However, the authors caution against excessively prohibitive measures, as they may drive cryptocurrency activities into the shadows. Instead, the report emphasizes the need to create a regulatory framework that channels innovation into socially useful directions. The authors assert that this will remain a key challenge in the future.
One of the major potential market risks mentioned in the study is Bitcoin exchange-traded funds (ETFs), which can lower barriers to entry for less sophisticated investors and increase their exposure to cryptocurrency. The authors note that ETF investors may face significant losses even if they do not directly own any cryptocurrency assets. Additionally, the study warns that crypto futures-based ETFs could increase price volatility and amplify risks if they hold a significant portion of the futures market.
Related Post
It is worth noting that the study does not clearly define which emerging markets it specifically refers to. Some jurisdictions, including China and Pakistan, have been quite restrictive in terms of cryptocurrency regulations, while others may have different regulatory landscapes. Further clarification is needed on how the situation differs in more developed countries.
The BIS has been cautious about the adoption of cryptocurrencies like Bitcoin, as indicated by this study and previous reports. In a separate report from July, the international financial institution expressed skepticism towards cryptocurrencies, including concerns about stablecoin instability and the perceived irreversibility of smart contracts. However, the BIS spoke highly of central bank digital currencies (CBDCs) and their potential to underpin the future monetary system, stating that CBDCs would serve as the foundation for further innovative developments.
In conclusion, the study from the Bank for International Settlements suggests that cryptocurrencies have not reduced financial risks in emerging economies but have instead amplified them. The report highlights the need for regulatory frameworks that steer cryptocurrency innovation towards socially beneficial directions. It also raises concerns about Bitcoin ETFs and their potential impact on market risks. As the BIS continues to evaluate the role of cryptocurrencies in the global financial system, it maintains a positive outlook on central bank digital currencies as a foundation for future monetary innovations.
