By George Ward
According to a recent report by the Bank for International Settlements (BIS), cryptocurrencies like Bitcoin (BTC) have yet to achieve their intended goal of mitigating financial risks in developing economies. On the contrary, the report noted that digital currencies have intensified these regions’ financial vulnerabilities.
Highlighting Risks Of Crypto In Emerging Markets
The Consultative Group of Directors of Financial Stability (CGDFS) recently released a new report on cryptocurrencies and their impact on the financial stability of emerging economies. The analysis was collaboratively conducted by central banks from BIS member countries in the CGDFS.
However, it is essential to note that the views expressed in the report are those of the individual authors and do not necessarily reflect the BIS position. The researchers behind this report pointed out that cryptocurrencies, including Bitcoin, may offer a deceptive appeal by appearing to be a fix to financial difficulties in developing economies.
The report further noted that cryptocurrencies have been aggressively promoted as cost-effective payment options and potential fiat currency replacements in countries battling rampant inflation or volatile exchange rates. However, these digital assets will only amplify developing economies’ economic uncertainty and expose their vulnerabilities.
As expressed in the report, authorities have various policy measures to counter the risks posed by digital assets. Such efforts include complete prohibitions of the use of crypto and controlled oversight.
The report also emphasizes the risk of central banks and regulatory bodies becoming overly restrictive to the sector. Hence, the paper cautions that such an approach may unintentionally push crypto operations into unclear or overtly restricted domains.
The authors noted that even though crypto-related activities have not fully achieved their intended goals, the technology’s potential applications are far-reaching and beneficial to the traditional finance system.
On Bitcoin ETF
Furthermore, the central banks identified Bitcoin exchange-traded funds (ETFs) as a potential market hazard in emerging economies. According to them, these products can lower the entry barriers for “less sophisticated investors” while increasing market participation.
The report authors opined that investors in Bitcoin ETFs would possess no actual crypto assets and would remain vulnerable to substantial losses if the asset’s price declines. Hence, the authors claim that crypto-based ETF futures can worsen price volatility and compound risks for investors if they command a significant share of the futures market.
The study further stated that the implications for emerging markets are huge because it encompasses many jurisdictions. Hence, it is no wonder that certain countries, such as China and Pakistan, have since enacted strict crypto regulations or banned crypto activities completely.
However, many other developed countries’ positions regarding this matter remain to be determined, leaving room for speculation on potential regulatory disparities. While not reflecting the BIS’s official position, the study highlights the institution’s reservations about adopting cryptocurrencies like Bitcoin.
This sentiment is consistent with a previous report from last month. At that time, the international financial body reaffirmed its reservations about crypto, citing common concerns such as stablecoin volatility and the perceived immutability of smart contracts.
In contrast, the global financial institution expressed optimism about the role of central bank digital currencies (CBDCs) upon implementation. CBDCs, according to the body, could serve as the bedrock of future global monetary systems, laying the groundwork for subsequent innovations.