Crypto Amplified Financial Risks in Emerging Markets, Says BIS Study

Overview:

A new study published by the Bank for International Settlements (BIS) has found that cryptocurrencies, like Bitcoin, have not reduced but rather "amplified financial risks" in less developed economies. The study, conducted by BIS member central banks, highlights the illusory appeal of cryptocurrencies as a quick solution for financial challenges in emerging markets. The report recommends various policy options to address these risks and emphasizes the need for a regulatory framework to channel innovation into socially useful directions.

Key Findings:

The study conducted by BIS member central banks in emerging markets emphasizes the illusory appeal of cryptocurrencies as quick solutions for financial challenges.

Authorities have various policy options to address the financial stability risks posed by cryptocurrencies, ranging from outright bans to regulation.

Excessively prohibitive policies may drive crypto activities into the shadows, highlighting the need for balanced regulation.

The authors stress that while cryptocurrencies have not fulfilled their stated goals to date, their technology still holds potential for constructive applications.

Bitcoin exchange-traded funds (ETFs) are identified as major potential market risks in emerging markets, as they can lower barriers to entry for less sophisticated investors.

The study warns of situations where Bitcoin ETF investors could face significant losses even if they do not directly own crypto assets.

Crypto futures-based ETFs could increase price volatility and amplify risks if they hold a large portion of the futures market.

It remains unclear which emerging markets are referred to in the study, and whether the situation differs for more developed countries.

The BIS did not comment on the study when contacted by Cointelegraph.

Implications:

The study highlights the need for caution in the adoption of cryptocurrencies, suggesting that they have not effectively reduced financial risks in emerging markets. The report recommends a regulatory framework to guide innovation in socially useful directions. Furthermore, the study warns of the risks associated with Bitcoin ETFs, particularly for less sophisticated investors. This research adds to the BIS's previous skepticism towards cryptocurrencies and its positive view of central bank digital currencies.