How Cryptoassets Introduce Vulnerabilities in Developing Economies
Cryptoassets, often touted as the future of the financial landscape, have not fulfilled their envisioned potential. Instead, they are exacerbating financial vulnerabilities in developing economies, as outlined in a study conducted by the Bank for International Settlements (BIS).
The allure of cryptoassets as a straightforward and expedient remedy for financial hurdles, especially in emerging economies, has yet to materialize. Contrarily, the BIS report underscores how these assets are compounding rather than mitigating financial risks in less developed nations.
The report delves into the hypothetical scenario of increased integration between crypto and conventional financial markets. It emphasizes the necessity of evaluating cryptoassets, just like any other assets, from the perspective of risk and regulation, focusing on potential threats to financial stability.
The identified risks are multifaceted, originating from the inherent attributes, arrangement, composition, and operation of crypto markets.
To navigate this landscape, the report proposes collaborative efforts among national authorities to outline pertinent data required for effective market surveillance. This involves pinpointing pivotal junctures where financial institutions and core market frameworks intersect.
Nevertheless, this approach confronts a challenge regarding anonymity, which is a driving factor for certain individuals and entities embracing crypto assets.
The regulatory and supervisory frameworks advocated by the report encompass a spectrum of actions, including bans, containment measures, and regulatory policies.
The BIS document acknowledges the complexities of an outright ban due to crypto markets’ decentralized and semi-anonymous nature. Implementing such a ban might prove impractical, resulting in diminished transparency and predictability, alongside potential losses in innovative advancements within the crypto space.
As seen in containment strategies, efforts to control the flow of funds between traditional financial systems and crypto markets face analogous obstacles to outright bans, as effective fund control might be unattainable in practice.
The report endorses the concept of regulation; however, it recognizes that motivations for regulation vary across jurisdictions. Additionally, data gaps pose a challenge, where the role of disclosure is crucial.
Earlier this year, the European Union’s financial services leader advocated for global emulation of EU cryptoasset regulations to establish a consistent approach to safeguarding consumers and financial well-being.
According to a recent BIS survey conducted late last year, approximately two dozen central banks across both advanced and emerging economies are projected to introduce digital currencies into circulation by the close of this decade.