BIS Highlights Concerns About Cryptoasset-Linked Financial Stability Risks in Emerging Markets

• BIS and CGDFS release a report on financial stability risks from cryptoassets in emerging market economies.
• The report highlights the amplification of financial risks due to cryptoassets and advocates for a balanced regulatory approach.

Decoding BIS Report: Assessing Cryptoasset Risks in Emerging Market Economies and the Regulatory Way Forward

The Bank for International Settlements (BIS), in collaboration with the Consultative Group of Directors of Financial Stability (CGDFS), has unveiled a comprehensive report titled “Financial stability risks from crypto assets in emerging market economies” on August 22. This research, conducted with the participation of BIS-affiliated central banks from nations including Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States, delves into the potential consequences of cryptoassets for the financial stability of emerging market economies (EMEs).

The report sheds light on the rapid transformation of digital finance and the swift proliferation of cryptoassets. While these assets have been positioned as cost-effective payment solutions and alternatives for accessing the financial system, particularly in nations grappling with high inflation or exchange rate fluctuations, they have simultaneously exacerbated financial risks in less developed economies. The study is particularly critical of the “illusory appeal” of cryptocurrencies like Bitcoin as quick fixes for financial challenges in emerging markets.

Furthermore, the BIS report pinpoints various risks linked to cryptoassets, encompassing market, liquidity, credit, operational, bank disintermediation, and capital flow risks. One notable concern underscores the potential for price volatility to magnify market risk through direct holdings of cryptoassets by institutions or households. As the value of these assets fluctuates, holders face the possibility of substantial losses.

The report also delves into potential hazards tied to Bitcoin exchange-traded funds (ETFs) in emerging markets. Such products can lower entry barriers for less experienced investors, heightening their exposure. The study’s authors caution that Bitcoin ETF investors might not possess any actual crypto assets but could encounter significant losses in the event of Bitcoin’s price decline.

Additionally, the BIS advocates for a cautious approach to crypto regulation. While some jurisdictions, like China, have opted for outright bans, others have sought to regulate the industry. The BIS emphasizes the importance of avoiding an “excessively prohibitive approach,” which could drive crypto activities underground. Instead, the institution proposes a balanced strategy, urging local regulators to consider selective bans, containment measures, and targeted regulation of specific crypto assets.

In conclusion, while BIS and other reports underline the potential risks tied to cryptoassets in EMEs, they also acknowledge the potential of the underlying technology. The challenge for regulators and policymakers lies in directing this innovation toward socially beneficial outcomes while upholding financial stability.