According to a research from the Bank for International Settlements, cryptocurrency assets, which were promoted as the financial industry’s future, have not only fallen short of their promises but are also raising financial risks in emerging markets.
The BIS analysis revealed that while cryptoassets have the deceptive appeal of being an easy and quick fix for financial problems, especially in emerging markets, they have so far not decreased but rather enhanced the financial risks in less developed economies.
With a focus on potential dangers to financial stability, the paper examines what would happen if cryptocurrency and traditional financial markets combined in the future. This is because cryptoassets should be evaluated from a risk and regulatory viewpoint like all other assets.
The dangers are numerous, and the nature, structure, composition, and function of those markets all contribute to the vulnerabilities of cryptoassets.
The paper makes the case that national authorities can work together to specify the information they require in order to properly monitor the market, with a focus on the identification of key relationships between financial institutions and the main market infrastructures.
However, this entails disclosure components that go against the secrecy that some individuals and organizations choose cryptoassets for in the first place.
The report’s recommendations for policing and monitoring the markets for cryptoassets include prohibitions, confinement, and regulation.
According to the BIS study, an outright prohibition may not be enforceable given the offshore and pseudo-anonymous nature of cryptoasset exchanges.
Instead, these markets would become even less predictable and transparent as policymakers would lose all awareness of them. Additionally, all potential innovation benefits from markets for cryptoassets would be lost.
Containment, or maintaining control over the exchange of funds between conventional financial systems and crypto market assets, faces the same challenges as a ban because it may not be practical to manage funds in practice.
According to the report, regulation is accompanied by varied motivations depending on the jurisdiction and adds the issue of data gaps, where disclosure once again plays a significant role.
The head of financial services for the European Union stated earlier this year that the rest of the world should adopt EU regulations for cryptoassets to establish a worldwide strategy that safeguards consumers and financial stability.
According to a study, almost two dozen central banks in emerging and advanced economies are anticipated to have digital currencies in use by the end of the decade.
