The Bank for International Settlements (BIS) has published a paper entitled Financial Stability Risks from Cryptoassets in Emerging Market Economies (EME). As one may surmise, the report addresses the risk of crypto and the impact on traditional financial services, including bank disintermediation. The research was produced by a group of central banks, including the United States (Federal Reserve Bank of New York).
The document acknowledges the benefits of crypto or digital assets as they may provide lower transaction fees and faster transfer and payments. At the same time, there is a perception of the ability to generate potentially high rates of returns.
BIS states:
- First, financial markets can experience market risk, given that the high price volatility of cryptoassets can result in losses for investors exposed directly or indirectly to cryptoasset markets.
- Second, investors can face liquidity risks due to the lack of transparency in cryptoasset operations and the concentration of trading in just a few large crypto exchanges, among other factors.
- A third area is credit risk, which can materialise through the lack of accountability or sound governance in cryptoasset markets and through the excessive leverage present in decentralised finance (DeFi) protocols.
- Fourth, operational risks can emerge as cryptoassets are prone to cyber-attacks and system failures, as they depend on the internet and software-coded contracts.
- Fifth, wide adoption of cryptoassets can lead to risks of currency substitution. Consumers shifting away from deposits to cryptoassets can lead to bank disintermediation.
- Sixth, their use for cross-border transfers and payments can result in capital flow risks.
The document concludes by labeling crypto as providing an illusory appeal of binge a simple and quick solution for EMEs. But so far, crypto has only heightened risk in less developed economies. The authors state that creating a regulatory framework can help in channeling crypto in a positive direction.
The paper may be accessed here.
