A recently released study from the Bank for International Settlements (BIS) has indicated that, contrary to expectations, cryptocurrencies like Bitcoin have not reduced financial risks in less developed economies but have actually exacerbated them. The report, titled “Financial Stabilization ization city Risks from Cryptoassets in Emerging Market Economies,” was published on August 22 by the Advisory Group of Directors for Financial Stability (CGDFS).
The research was conducted by central banks within the CGDFS, including those of countries such as Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States. The study highlights that the expressed views belong to the authors and not necessarily to the BIS. It suggests that cryptocurrencies have been promoted with an "illusory appeal" as a quick fix for financial challenges in emerging markets, presenting themselves as low-cost payment solutions or alternatives to national currencies in inflation or volatility-prone economies.
The report acknowledges that cryptocurrencies pose potential risks to financial stability in emerging markets. Authorities have various policy options to address these concerns, ranging from outright prohibition to regulatory measures. However, the authors caution against overly prohibitive measures that might drive cryptocurrency activities into unregulated channels . They emphasize that while crypto activities have not met their intended goals, the underlying technology still holds potential for constructive applications, and the challenge lies in creating a regulatory framework that guides innovation for societal benefits.
The study points to Bitcoin exchange-traded funds (ETFs) as a significant potential market risk in emerging economies. These products could lower barriers to entry and increase exposure for less experienced investors, leading to potential large losses during Bitcoin price declines. The report also warns about cryptocurrency futures-based ETFs, as they could heighten price volatility and amplify risks if they gain a substantial share of the futures market.
The report's scope of emerging markets seems somewhat ambiguous, as some of these jurisdictions, like China and Pakistan, have adopted strict cryptocurrency regulations. Meanwhile, other more developed economies have taken diverse approaches. Although not necessarily reflective of BIS's stance, the report adds to the narrative that the institution is cautious about cryptocurrencies like Bitcoin. In a separate July report, BIS expressed skepticism about digital currencies, highlighting issues with stablecoins' stability and the purported immutability of smart contracts.
