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In a recent paper, the Bank for International Settlement (BIS) has issued a warning to emerging economies about the possible financial risks associated with crypto related investments.
The international financial institution has strong concerns about the ability of these emerging economies to monitor the digital asset market as well as assess their financial stability risks.
BIS Report Details Crypto Risks
These fears were amplified in the report released by the Consultative Group of Directors of Financial Stability (CGDFS) on Tuesday.
The report which was titled “Financial Stability risks from crypto assets in emerging market economies” was conducted by BIS member central banks within the CGFDS. The central banks of Argentina, Brazil, Chile, Canada, Colombia, and the United States were some of the participants in the study.
Precisely, the report explained that cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and others are often promoted as a quick solution to financial challenges with an “illusory appeal.
The study says that these assets “have been promoted as low-cost payment solutions, as alternatives for accessing the financial system and as substitutes for national currencies in countries with high inflation or high exchange rate volatility.”
BIS Advocates Cautious Approach to Crypto
Reportedly, many authorities have seen through this asset class and discovered that they hold certain risks especially due to their volatility. This knowledge has led some jurisdictions to introduce policies which seek to address those risks. Some nations like China have turned to outright ban of the bolstering asset class, others tried to manage the industry with regulation.
However, the paper made it clear that it is necessary that these authorities do not engage in an “excessive prohibitive manner” as this also holds some risks.
Moreso, the adoption of such a strategy could drive crypto assets to the shadows and that is not the intention for the nascent industry. It is still believed that crypto and blockchain technology could still be applied in a more constructive way.
Hence, the BIS has urged local regulators to adopt selective ban, containment and regulation of certain types of crypto assets. In addition, these regulators are urged to establish clear regulatory mandates that create a distinction between activity-based and entity-based regulations.
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