Bank of International Settlements (BIS) has warned that crypto assets pose a high risk to the economies of emerging markets. The BIS believes that despite the promises attached to crypto assets, there are underlying risks, especially for emerging markets.
Bank for International Settlements is an international financial institution that serves as a bank for central banks. The BIS facilitates cooperation and collaboration among central banks and other financial authorities to promote monetary and financial stability, as well as international financial cooperation.
It provides a forum for central banks to exchange information, conduct research, and discuss policy issues.
An emerging market economy refers to the economic state of a developing nation that is progressively integrating into global markets as it undergoes growth.
The concerns of the BIS is a product of a report done by Consultative Group of Directors of Financial Stability (CGDFS), focused on financial stability risks from crypto assets in emerging market economies
Promise of crypto assets
BIS explained that while in recent years, crypto assets have been tagged as a panacea for financial challenges in Emerging Market Economies (EMEs), promising low-cost payment solutions, financial access alternatives, and currency substitutes, a closer look reveals that these digital assets have not mitigated but rather amplified financial risks in less developed economies.
As a result, the need for a thorough risk assessment and regulatory framework for crypto assets is gaining prominence, especially as their adoption increases among retail investors and their connections with the traditional financial system expand.
BIS added that due to the additional complexities brought about by crypto assets into EMEs, there is a need to subject crypto assets to the same scrutiny and regulations as any other asset class.
It highlights that the concerns grow more significant as retail investors become more interested and as the integration between crypto assets and traditional financial systems deepens.
Carefulness in exercising regulations
Addressing the risks and what emerging economies should do, the BIS said that while policy makers and regulatory bodies now face a range of options to manage the risks posed by crypto assets such as outright bans to containment strategies and comprehensive regulations, it’s important to be careful in analyzing the best approach to take.
It continued by saying that while bans and containment measures might prevent immediate financial instability, they could inadvertently drive these activities into unregulated spaces.
Excessive prohibitive measures might also hinder the ability to engage with responsible actors in the cryptoasset sector.
IMF – Don’t ban crypto
This is also in line with the standpoint of the IMF on how cryptocurrencies should not be banned. In June, the IMF published a report on digital payments in Latin America and advised against completely banning crypto assets, citing that addressing drivers of crypto demand and improving transparency would be more effective strategies.
The report responds to countries that have opted for bans despite existing market demand for cryptocurrencies, emphasizing that such bans may not yield beneficial long-term results.
Instead, the IMF suggests focusing on meeting citizens’ digital payment needs and enhancing transparency through proper record-keeping of crypto asset transactions in national statistics.
The way to go
BIS noted that responsible innovation and new technologies can potentially streamline payment systems, lower entry barriers, and improve financial services. Although it added that crypto assets have not fully met their intended objectives so far, the underlying technology still holds promise.
Hence, the challenge lies in creating a balanced regulatory framework that guides innovation in socially beneficial directions.
“Throughout history, technology has been key to driving improvement and increasing the resilience of financial services,” BIS said.
“Creating a regulatory framework to channel innovation into such socially useful directions will remain a key challenge in the future.”