Appeal of Crypto Is ‘Illusory’ and Amplifying Financial Risks of Emerging Markets: Bank for International Settlements

Cryptocurrencies increase the financial risks of emerging economies, according to a new report published by the global central bank umbrella organization known as the Bank for International Settlements (BIS).

The report says that cryptocurrencies cannot solve developing countries’ financial challenges, despite some arguing that digital assets can address such problems as high-fee payment transactions and high inflation.

The report is the work of the BIS’s Consultative Group of Directors of Financial Stability (CGDFS), which includes Brazil, Canada and the United States. The views expressed in it are “not necessarily the views of the BIS.”

Says the report,

“Crypto assets hold out the illusory appeal of being a simple and quick solution for financial challenges in EMEs (emerging market economies). They have been promoted as low-cost payment solutions, as alternatives for accessing the financial system and as substitutes for national currencies in countries with high inflation or high exchange rate volatility.

However, crypto assets have so far not reduced but rather amplified the financial risks in less developed economies. Therefore, they should be assessed from a risk and regulatory perspective like all other assets. This will become even more pressing if crypto assets are more widely adopted by retail investors and if links with the traditional financial system increase.”

The report also says that developing countries have a number of options to curtail the alleged negative impacts of cryptocurrencies. However, the report warns an outright prohibition on digital assets may be too severe and have unintended consequences.

“Authorities face a number of policy options to address risks in crypto assets, ranging from outright bans to containment to regulation. Bans and containment – if they are effective – may prevent financial stability risks from arising. At the same time, there are risks if central banks and regulators react in an excessively prohibitive manner.

For instance, activities may be driven into the shadows, and it may be more difficult to influence responsible actors in the sector. More generally, new approaches should not be automatically classified as ‘dangerous’ simply because they are different.”

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