BIS: Crypto’s ‘Illusory’ Appeal Puts Emerging Economies at Risk

Have cryptocurrencies achieved their promise? A new Bank for International Settlements (BIS) report argued they haven’t.

Cryptocurrency has put emerging market economies (EMEs) at risk, BIS said in the report issued Tuesday (Aug. 22).

“Cryptoassets hold out the illusory appeal of being a simple and quick solution for financial challenges in EMEs,” the report said.

Digital currencies have been proffered as a low-cost alternative for accessing the financial system and as a substitute for national currencies in countries with high rates of inflation or exchange rate volatility, per the report.

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

Cryptoasset markets also have a lack of transparency and accountability, according to the report.

“Information on the ownership, legal structure, governance and management of the key operating entities is sparse,” BIS said in the report. “Data on the players and trading activity of cryptoassets can be difficult to obtain.”

These risks show the need for crypto to be regulated the same way other parts of the financial sector are governed, per the report, although there are also dangers in getting too strict.

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

The report comes after a rocky year for the crypto sector, which has undergone market upheaval, regulatory fights involving top firms like Coinbase and Binance, and criminal action against the founders of FTX and Celsius.

Against that backdrop, countries are working to regulate the sector. The United Kingdom last month unveiled its “same activity, same risk” rules for the industry.

“[C]ryptoasset players need to stop operating outside the regulatory perimeter or in non-compliance with existing rules,” said John Schindler, general secretary of the country’s Financial Stability Board (FSB).

This is the second BIS warning about the crypto sector in as many months. In July, the organization presented a paper to the G20’s finance ministers that argued that crypto and decentralized finance pose grave risks to investors — retail ones in particular — as growth is driven chiefly by the “speculative influx” of new users seeking large returns.

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