BIS Warns That Cryptocurrency Is Amplifying Financial Risks in Developing Economies

A man conducted a transaction at a cryptocurrency shop in Hong Kong, on Nov. 21, 2022. Sung Pi-Lung/The Epoch Times

The Bank for International Settlements (BIS) has claimed that cryptocurrency assets are amplifying rather than reducing financial risks in emerging market (EM) economies.

The report, which was published on Aug. 22, recommended that regulators should oversee crypto the same way they monitor other assets, according to warnings from central banks worldwide.

The Consultative Council for the Americas (CCA), which includes policymakers from central banks in the United States, Argentina, Brazil, Canada, Chile and Mexico, prepared this report.

The CCA noted that crypto has been promoted as a low-cost form of payment and as a substitute for local currencies in countries suffering from high inflation or facing high exchange rate volatility.

Developing Markets Increasingly Adopting Cryptocurrency

The BIS said that the adoption of cryptocurrencies adoption has been on the rise in EMEs, to help boost limited investment and overcome weak financial instruments in those poorer countries.

According to Chainanalysis, two out of the top 20 countries that are considering adopting crypto are emerging markets.

Many citizens in these nations are in favor of cryptocurrency systems, as they may offer a chance at providing a safer haven against weak national currencies.

Countries such as Venezuela, El Salvador, and Nigeria are experimenting with using them as a financial alternative to avoid volatile inflation rates.

Even so, official banking authorities in emerging economies remain concerned about having less ability to monitor crypto assets and to assess their financial stability risks.

Central bankers fear that widespread cryptocurrency use could worsen financial stability risks in these economies due to weak legal systems that could make it harder to enforce contracts.

The international financial group added that “inconsistent enforcement can create confusion and raise market risk.”

However, the BIS said that cryptocurrency as a solution to payment challenges in EM economies should not be classified as a threat, as they provide an valuable alternative form of exchange, but it still believes that the appeal of digital currency as a solution in those markets was “illusionary.”

“Crypto assets have so far not reduced but rather amplified the financial risks in less developed economies. Therefore, they should be assessed from a risk and regulatory perspective like all other assets,” said the report.

The CCA also cited that the “combination of the lack of financial literacy and technological knowledge” in EM economies may potentially become a “catalyst for risks to financial stability, especially concerning crypto assets.”

Banking Regulators Remain Skeptical About Crypto

For over a decade, the International Monetary Fund and the BIS have been monitoring the growing risks to global financial stability from cryptocurrencies, as it expanded from a niche market to a $2.9 trillion industry by November 2021.

The report further warned that weaknesses in the crypto markets could translate into monetary stability risks in traditional financial markets.

Over the past year and a half, cryptocurrency values have plunged 75 percent, which has only caused limited damage to the overall global financial markets, but central banks are still wary of future risks.

In developed markets, the BIS said that a move for a more risk-based approach to regulating cryptocurrency may become “more pressing if crypto assets are more widely adopted by retail investors and if links with the traditional financial system increase.”

About 17 percent of Americans this year said they had invested in or traded in cryptocurrency, about the same figure it was in 2022 and 2021, according to the Pew Research Center.