Central banks’ reps in several developing countries warned of the risks associated with the use of cryptocurrencies, emphasizing that a complete ban on digital assets would only make matters worse.
The study, initiated by the Bank for International Settlements (BIS), examined the possible risks of integrating crypto-assets and the traditional financial system in some developing countries. The report with conclusions was published by the Consultative Group of Directors of Financial Stability (CGDFS).
According to the document, cryptocurrencies like Bitcoin offer illusory prospects for quick solutions to financial problems and their use only increases financial risks in developing countries. Specifically, the financial risks associated with the use of digital assets were highlighted as:
- Market risk, which is related to the volatility of cryptocurrency prices, the lack of intrinsic value and uncertain reserves of some crypto projects, as well as the existence of crypto whales and the lack of liability for manipulation.
- Liquidity risk caused by the centralization of large exchanges, the mismatch in liquidity of reserves, the possibility of massive withdrawals by investors, and operational vulnerabilities.
- Credit risk, which is exacerbated by market structure, lack of accountability and transparency, and leveraged financing in the crypto-asset market.
- Operational risk, which arises from the high reliance on blockchain that has a number of infrastructural issues, leading to security risks.
- Bank disintermediation risk that arises from the possible substitution of national and reserve currencies.
According to the report, cryptocurrency assets, which are seen by users as low-cost payment solutions and used as an alternative to traditional financial instruments, increase financial risks in developing countries, and authorities are obliged to ensure the regulation of such assets. However, the authors of the study emphasize that banning the use of cryptocurrencies will not solve the problems, but will only exacerbate them, because in such a case the crypto market will simply move into the shadows. Therefore, the regulatory framework should be created with the possibility to legally use cryptocurrencies, which will stimulate innovation.
The study was conducted by the central banks of CGDFS member countries, including Argentina, Brazil, Canada, Chile, Colombia, Chile, Mexico, Peru, and the United States. The document emphasizes that the conclusions of the study may not coincide with the views of the BIS representatives.
The potential impact of various digital assets on financial stability is also studied by representatives of the U.S. Fed.
