October 4, 2023 1:13 pm

BIS papers explore amplified financial risks in emerging markets due to crypto.

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A new study published by the Bank for International Settlements (BIS) suggests that cryptocurrencies like Bitcoin (BTC) have not reduced financial risks but have instead amplified them in less developed economies. The study, titled “Financial stability risks from crypto assets in emerging market economies,” was released by the Consultative Group of Directors of Financial Stability (CGDFS), which includes central banks from Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States.

According to the report, cryptocurrencies such as Bitcoin have been presented as a quick solution for financial challenges in emerging markets, offering low-cost payment solutions and alternatives for accessing the financial system. However, the authors argue that these claims have not been fulfilled, and instead, cryptocurrencies have extended the financial stability risks in these economies.

The study highlights the importance of policy options to address these risks, ranging from outright bans to regulation. However, the paper also warns against excessively prohibitive policies, as they may drive crypto activities into unregulated and shadowy spaces. The authors suggest that creating a regulatory framework to channel innovation into socially useful directions will be a key challenge going forward.

One of the major potential market risks in emerging markets mentioned in the study is Bitcoin exchange-traded funds (ETFs). The authors argue that such products can lower the barriers to entry for less sophisticated investors and increase their exposure. Moreover, crypto futures-based ETFs may increase price volatility and amplify risks if they hold a significant portion of the futures market.

It is worth noting that the study does not specify which emerging markets are being referred to, and it is unclear whether the situation is different for more developed countries. The BIS did not provide immediate comment on the matter.

This study is another indication that the BIS remains cautious about the adoption of cryptocurrencies like Bitcoin. In a previous report, the international financial institution expressed skepticism over crypto, highlighting issues such as the instability of stablecoins and the irreversibility of smart contracts.

However, the BIS speaks favorably about central bank digital currencies (CBDCs), considering them as the foundation upon which further innovations can be built. The authority believes that CBDCs have the potential to underpin the future monetary system.

In conclusion, the BIS study suggests that cryptocurrencies like Bitcoin have amplified financial risks in emerging markets rather than reducing them. The report emphasizes the need for policy options to address these risks and cautions against excessively prohibitive measures. The study also highlights the potential risks associated with Bitcoin ETFs and acknowledges the importance of regulatory frameworks to channel crypto innovation into socially useful directions.

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Original Source: BIS papers explore amplified financial risks in emerging markets due to crypto.

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