The central banks of Canada, Brazil, the U.S., and Mexico have identified crypto-associated risks. However, they have cautioned against unreasonably exorbitant regulations. A new study by The Bank for International Settlements (BIS) shows that cryptocurrencies, for instance, Bitcoin, have declined to minimize but instead ‘heightened financial risks.’
Financial Stability in Emerging Market Economies
A new report concerning cryptocurrencies, titled ‘Financial stability from crypto asserts in emerging market economies,’ was released by the Consultative Group of Directors of Financial Stability (CGDFS) on August 22.
BIS member central banks carried out this study within the CGDFS, which includes the U.S, Canada, Argentina, Chile, Colombia, Mexico, Peru, and Brazil. The document stressed that the expressed perspectives originated from the authors and did not necessarily reflect BIS’s views.
The study’s authors claimed that cryptocurrencies such as Bitcoin possess the deceptive appeal of being a fast solution for financial problems in upcoming markets. This study reads that they have been endorsed as low-cost payment solutions.
In this case, the BIS study discovered options for accessing the financial system and as alternatives for federal currencies in nations with significant inflation or high exchange rate volatility. Amid cryptocurrencies’ purported extension of the financial stability risks of upcoming markets, authorities have several policy interventions to handle the risks. This ranges from complete bans to restraint of regulation.
Central Banks and Regulators Posing Unreasonable Prohibition of Crypto Policies
The paper also shows that concurrently, there are several risks in case regulators and central banks respond unreasonably prohibitively. It also adds that these policies can drive crypto activities into the shadows.
Amid the failure of crypto-associated activities to achieve their stated objectives to date, this technology may be applicable in several constructive ways. Developing a regulatory model to drive innovation in socially appropriate directions will still be a problem in the future.
Central banks mentioned Bitcoin exchange-traded funds as one of the primary likely market risks in upcoming markets. This is because such products can reduce the hurdles to entry for less complex investors and enhance their exposure.
Crypto Futures ETFs Threaten to Advance Prince Instability
The study’s authors highlighted a case where Bitcoin ETF investors lack crypto assets but still encounter significant losses following a price drop. In addition, crypto futures-founded ETFs can promote price instability and intensify risks if they hold a considerable part of the market.
It also seems relatively unclear what upcoming markets are implied in this study since most of this category’s jurisdictions, including Pakistan and China, have had numerous restrictions regarding crypto laws. Similarly, it is unclear if the situation differs for more developed nations.
Stablecoin Instability and Irreversibility of Smart Contracts
Despite not expressing perspectives regarding the BIS, this study is another indicator of the authority’s caution concerning adopting cryptocurrencies, for instance, Bitcoin.
Another July report revealed that the global financial institution echoed its high doubt concerning crypto by highlighting the commonly mentioned problems, for example, stablecoins’ instability and the smart contracts’ alleged irreversibility.
On the other hand, the central bank praised the central bank digital currencies (CBDCs). The authority wrote that reinforcing the future monetary system would result in CBDCs being the basis for other innovations.
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