In a recent publication, the Bank for International Settlements (BIS) stated that as the adoption of crypto assets continues to increase, countries in less developed regions are exposed to “amplified financial risks.” The BIS observation compelled the Consultative Group of Directors of Financial Stability (CGDFS) to study “Financial stability risks from crypto assets in emerging market economies.”
The CGDFS group teamed up with central banks in emerging markets to examine the financial risks associated with crypto assets. In an August 22 report, the BIS team worked with the central banks from Brazil, Peru, the US, Argentina, Canada, Chile, Mexico, and Colombia to conduct the study.
Impact of Crypto Assets on Emerging Markets
Even though the results were based on the author’s opinion, the financial regulators underlined the financial risk associated with digital assets. The study demonstrated that crypto assets like Bitcoin have an illusory appeal that solves economic challenges battling developing economies.
The researchers underlined the benefits of cryptocurrency including a cost-effective payment solution to businesses. Also, cryptocurrency has eased the accessibility to the financial system since it’s used as a substitute currency in countries where inflation continues to bite.
However, crypto assets are prone to financial stability risks in emerging economies just like other physical currencies. Such risk has obliged authorities to formulate policies and regulatory frameworks to address the risks.
In some countries, policymakers have imposed limits on specific cryptos. Besides the restrictions, if the regulators impose an “excessively prohibitive manner” on the digital asset, the industry might experience slow growth due to decreased activities.
Crypto as an Illusory Appeal
Therefore to address the risk related to crypto assets, the research has advised the authority to develop a regulatory framework that supports innovation. The study illustrated that advanced technology could be applied constructively to support the growth of the crypto industry. The report explained that the crypto sector had not attained its intended purpose due to its inability to overcome some challenges.
The central bank highlighted in the report that Bitcoin exchange-traded funds (ETFs) were a risk factor in an emerging market. They argued that the Bitcoin ETFs have attracted “less sophisticated investors” due to fewer entry requirements.
The BIS observed that the BTC ETFs have increased exposure to crypto assets. In addition, the study revealed that despite the Bitcoin ETF investors owning zero crypto assets, the holders are still exposed to the risk of losses if the Bitcoin prices decline further.
BIS to Support CBDC Development
In light of report the authority is concerned about the risk associated with crypto assets despite experiencing high Bitcoin adoption. In July, the BIS were worried that the crypto assets instability of stablecoins and the irreversibility nature of smart contracts.
On the contrary, the central banks were more optimistic that the central bank digital currency (CBDC) would strengthen the monetary system in the future. The central bank report demonstrated that the CBDC will be the core pillar that will support crypto innovations.
In July, the BIS issued a report outlining ways to safeguard the CBDC from cyber attacks. The international financial institution observed that unscrupulous players continue exploiting the smart contract to steal funds from the decentralized finance (DeFi) platforms.
The BIS argued that increased crypto-related crime exposes the CBDC platforms to security risks. The report outlined the approaches that should be enacted to improve the integrity and confidentiality of the CBDC.
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