August 22, 2023 at 15:20 GMTModified date: August 22, 2023 at 15:25 GMT
August 22, 2023 at 15:20 GMT

Crypto amplifies financial risk in emerging markets: BIS

BIS has criticised cryptocurrencies for escalating financial risk in developing countries. It recommended more regulation, rather than outright bans.

Crypto amplifies financial risk in emerging markets: BIS

Cryptocurrencies are causing more financial risks for developing countries, according to the Bank for International Settlements (BIS), a group of 63 central banks from around the world 

Despite this, the BIS recommends that more regulation should be introduced, rather than a complete ban. 

The banks highlight that cryptocurrencies are promoted with “illusory appeal” to solve multiple problems facing developing countries. Crypto is seen as a low cost payment solution, alternative route into investments, and as a substitute for national currencies.

“However, cryptoassets have so far not reduced but rather amplified the financial risks in less developed economies,” the report said. 

The report concluded that cryptocurrencies should be assessed and regulated just like any other asset. The BIS noted that outright bans could see activities “driven into the shadows” where “it may be more difficult to influence responsible actors in the sector”.

The BIS is still hopeful over the future of the digital assets. “While crypto-related activities have not fulfilled their stated goals to date, the technology could still be applied in various constructive ways,” it said.

A gateway to ETFs 

Exchange-traded funds that are based on cryptocurrencies could bring more financial risks, according to the financial organisation. The introduction of Bitcoin ETFs from the likes of BlackRock, are allowing a wider range of people to gain exposure to cryptocurrencies, without any specialist knowledge needed. 

The report said: “Among the risks, investors in Bitcoin ETFs own no cryptoassets but still face large losses when the price of Bitcoin drops. 

“Additionally, futures-based ETFs may increase price volatility and amplify risks if they hold a significant portion of the futures market.”

Problems facing developing countries

The report noted other crypto-related issues that are more damaging to developing countries. The technological nature of the asset is one of them, which raises opportunities for cyber attacks.

Crypto is also bringing inequality to emerging market economies (EMEs). The report said: “With relatively low and unequal technological development, EMEs will be more vulnerable facing cryptoassets complexities and rising adoption rates.” 

Meanwhile, fraud and scams could be more prevalent in developing countries due to weaker laws, according to the central bankers. This would increase vulnerabilities due to a lack of accountability. 

“A lack of clear regulation and inconsistent enforcement can create confusion and raise market risk,” the BIS said. 

BIS suggests next steps

Cryptoassets’ “illusory appeal” and financial risks must be met with regulation, according to the BIS. 

As part of its recommendation for moving forwards, the banking organisation suggested national authorities work together. It said authorities should gather data with an emphasis on financial institutions and “core market infrastructures”. 

This could also help developing countries by producing information that identifies “concrete use cases” in these markets. 

However, the organisation said: “Creating a regulatory framework to channel innovation into such socially useful directions will remain a key challenge in future.”

Previous BIS criticism

It is not the first time BIS has criticised cryptocurrencies. In July, the company said that crypto cannot be used as a replacement for fiat currencies as part of a report for G20 ministers.

El Salvador introduced Bitcoin as legal tender in 2021, but the country has since faced criticism over the move. High volatility and fees saw residents use more traditional forms of money, according to CNBC.  

“Crypto’s inherent structural flaws make it unsuitable to play a constructive role in the monetary system,” the BIS said.

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