Could crypto make economic risk greater?

According to a recent study by the Bank for International Settlements (BIS), cryptocurrencies, especially Bitcoin (BTC) have increased financial risks in less developed economies rather than acting as a revolutionary payment. The report titled “Financial stability risks from crypto assets in emerging market economies” is the result of collaborative efforts by BIS member central banks from Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States.

The study criticises the impact that cryptocurrencies like Bitcoin have on emerging markets. The report highlights the appealing nature of “quick fixes” for financial woes. These digital assets are known in the markets as low-cost payment alternatives, means of financial inclusion, and even substitutes for unstable national currencies in countries grappling with inflation and exchange rate volatility.

However, the report suggests that cryptocurrencies have escalated financial instability in the economies of emerging markets instead.

“While crypto-related activities have not fulfilled their stated goals to date, the technology could still be applied in various constructive ways. Creating a regulatory framework to channel innovation into such socially useful directions will remain a key challenge in future.”

The authors underline that the underlying technology holds potential for constructive applications. Establishing a regulatory framework to channel this potential in socially beneficial directions becomes a pivotal challenge going forward.

The report also spotlights potential hazards tied to Bitcoin exchange-traded funds (ETFs) in emerging markets. These funds could facilitate entry for less knowledgeable investors while amplifying their exposure. The study highlights the scenario where Bitcoin ETF investors could face substantial losses even without holding actual crypto assets, merely due to price drops. Additionally, ETFs based on crypto futures could heighten price volatility if they dominate a significant portion of the futures market.

However, the study’s parameters for emerging markets and whether the dynamics hold true for developed nations remain somewhat ambiguous. Notably, countries like China and Pakistan, considered emerging economies, have implemented stringent crypto regulations, challenging the broad classification.

This study underscores the BIS’s cautious stance toward cryptocurrency adoption. A previous BIS report from July reiterated scepticism about crypto, citing concerns such as stablecoin volatility and the perceived irreversibility of smart contracts. In contrast, the institution expressed optimism about central bank digital currencies (CBDCs), portraying them as the bedrock for future innovations in the monetary landscape.