Study Shows Cryptocurrencies Amplify Financial Risks in Emerging Markets
Summary:
Cryptocurrencies like Bitcoin have failed to reduce financial risks in less developed economies, according to a study by The Bank for International Settlements. The study warns of the “illusory appeal” of quick solutions for financial challenges in emerging markets and highlights potential risks associated with Bitcoin exchange-traded funds. While acknowledging the potential for constructive use of cryptocurrencies, the study emphasizes the need for a regulatory framework. The BIS remains cautious about crypto adoption but supports central bank digital currencies as the foundation for future innovations.
Cryptocurrencies, including Bitcoin, have not succeeded in reducing financial risks but have instead exacerbated them in less developed economies, according to a study published by The Bank for International Settlements (BIS). The report, titled "Financial stability risks from crypto assets in emerging market economies," was released by the Consultative Group of Directors of Financial Stability (CGDFS) on Aug. 22. Conducted by BIS member central banks within the CGDFS, the study highlighted that the opinions expressed are those of the authors and not necessarily of the BIS. The study emphasized that cryptocurrencies, such as Bitcoin, have presented a misleading allure as a quick fix for financial challenges in emerging markets. These digital assets have been promoted as low-cost payment solutions, alternatives for accessing the financial system, and substitutes for national currencies in countries facing inflation or exchange rate volatility. However, instead of reducing financial stability risks, the study suggests that cryptocurrencies have extended them in emerging markets. The report outlines several policy options to address these risks, including bans, containment, and regulation. The authors caution against excessively prohibitive measures, as they may drive crypto activities underground. They also noted that, despite not fulfilling their goals thus far, cryptocurrencies still hold potential for constructive applications. Establishing a regulatory framework to guide innovation in socially beneficial directions remains a significant future challenge. The study also highlights Bitcoin exchange-traded funds (ETFs) as a major potential market risk for emerging economies. These products lower entry barriers for less sophisticated investors and increase their exposure. The authors raise concerns about situations where Bitcoin ETF investors face significant losses even if they don't own any crypto assets, as well as the potential price volatility and amplified risks associated with futures-based ETFs. The study lacks clarity on which specific emerging markets are included and whether the situation differs for more developed countries. The BIS did not immediately respond to Cointelegraph's request for comment. While the study does not necessarily reflect the views of the BIS, it suggests caution regarding the adoption of cryptocurrencies like Bitcoin. In a separate report in July, the BIS expressed skepticism about crypto, highlighting issues such as stablecoin instability and smart contract irreversibility. However, the authority spoke highly of central bank digital currencies, noting their potential as the foundation for future monetary systems and further innovations.
Published At
8/22/2023 1:45:13 PM
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