Cryptocurrencies Amplify Financial Risks in Less Developed Economies: BIS Study

The Bank for International Settlements (BIS) has published a new study indicating that cryptocurrencies, such as Bitcoin (BTC), have not reduced financial risks but instead intensified them in less developed economies. The study, titled “Financial stability risks from crypto assets in emerging market economies,” was conducted by BIS member central banks within the Consultative Group of Directors of Financial Stability (CGDFS), including those in Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States.

The research highlights the perceived allure of cryptocurrencies in resolving financial challenges in emerging markets, emphasizing low-cost payment alternatives and potential substitutes for national currencies in countries with high inflation or exchange rate volatility. The report suggests that authorities have several policy options, ranging from outright bans to regulation, to address these risks associated with cryptocurrencies.

The study also cautions against excessively prohibitive reactions from central banks and regulators, as this may drive crypto activities underground. The authors argue that even though cryptocurrencies have not accomplished their intended goals thus far, their underlying technology can still be utilized constructively. They emphasize the importance of creating a regulatory framework to guide innovation towards socially beneficial directions as a key challenge for the future.

Bitcoin exchange-traded funds (ETFs) are identified as one of the major potential market risks in emerging markets, as they can lower entry barriers for less experienced investors while increasing their exposure. In addition, the authors of the study point out that Bitcoin ETF investors may face significant losses even without owning any crypto assets, and crypto futures-based ETFs have the potential to amplify risks and price volatility if they hold a substantial portion of the futures market.

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