The Bank for International Settlements (BIS), in conjunction with the Consultative Group of Directors of Financial Stability (CGDFS), unveiled a detailed report on August 22 entitled “Financial Stability Risks of Crypto-Assets in Emerging Market Economies.” This study, led by BIS member central banks from countries such as Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru and the United States, examines the potential impact of crypto assets on the financial stability of emerging market economies (EMEs). ). .
The report underscores the rapid evolution of digital finance and the rapid growth of crypto assets. While these assets have been promoted as low-cost payment solutions and alternatives to access the financial system, especially in countries with high inflation or exchange rate volatility, they have also “added financial risks” in less developed economies. The study specifically points to the “illusory appeal” of cryptocurrencies such as Bitcoin as quick fixes to financial challenges in emerging markets.
In addition, the BIS report identifies several risks associated with crypto assets, including market, liquidity, credit, operational, bank disintermediation, and capital flow risks. A major concern raised is the potential that price volatility could spread into market risk via the direct holding of crypto assets by institutions or households. Because the price of these assets fluctuates, holders risk incurring significant losses.
The study also addresses the potential risks associated with Bitcoin Exchange-Traded Funds (ETFs) in emerging markets. Such products can lower barriers to entry for less sophisticated investors, increasing their exposure. The study’s authors warn that Bitcoin ETF investors may not own cryptoassets, but could still incur significant losses if Bitcoin’s price falls.
In addition, the BIS advocates a cautious approach to crypto regulation. While some jurisdictions, such as China, have opted for an outright ban, others have sought to control the industry through regulation. The BIS emphasizes the importance of not responding in an “excessively prohibitively expensive manner” as this could push crypto activities underground. Instead, the institution is proposing a balanced approach, urging local regulators to introduce selective bans, curtailment and regulation of specific crypto-assets.
In conclusion, while the BIS and other reports highlight the potential risks associated with crypto assets in EMEs, they also recognize the potential of the underlying technology. The challenge for regulators and policymakers will be to channel this innovation in socially beneficial directions while ensuring financial stability.
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