Tuesday, 26 September 2023

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Crypto amplified financial risks in emerging markets: BIS papers

Crypto amplified financial risks in emerging markets: BIS papers

Cryptocurrencies like Bitcoin (BTC) have failed to reduce but rather have “amplified financial risks” in less developed economies, according to a new study published by the The Bank for International Settlements (BIS).

On Aug. 22, the Consultative Group of Directors of Financial Stability (CGDFS) released a new report on cryptocurrencies, titled “Financial stability risks from crypto assets in emerging market economies.”

The study was conducted by BIS member central banks within CGDFS including those in Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru and the United States. The document emphasized that the views expressed are those of the authors and “not necessarily the views of the BIS.”

According to the authors of the study, cryptocurrencies like Bitcoin hold out the “illusory appeal” of being a quick solution for financial challenges in emerging markets.

“They 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,” the study reads. As cryptocurrencies allegedly extended the financial stability risks of emerging markets, authorities have many policy options to address those risks, ranging from outright bans to containment to regulation, the report notes.

At the same time, there are also risks if central banks and regulators react in an “excessively prohibitive manner,” the paper reads, adding that such policies may drive crypto activities into the shadows. The authors added:

“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 central banks mentioned Bitcoin exchange-traded funds (ETFs) as one of major potential market risks in emerging markets as such products are able to lower the barriers to entry for “less sophisticated investors” and increase their exposure.

Among the risks, the study authors mentioned a situation where Bitcoin ETF investors “own no crypto assets but still face large losses when the price of Bitcoin drops.” Additionally, crypto futures-based ETFs “may increase price volatility and amplify risks if they hold a significant portion of the futures market,” the document notes.

Related: Ripple joins BIS cross-border…

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