Crypto money

The adoption of cryptoassets in emerging markets has exacerbated the financial stability risks these economies face, a new paper from the Bank for International Settlements (BIS) argues.

The report — which was prepared by a task force including central bankers from Canada, the U.S., Argentina, Brazil, Chile, Colombia, Mexico and Peru — analyzed both unbacked cryptoassets and so-called “stablecoins” from financial stability and regulatory perspectives.

It found that crypto adoption has been on the rise in emerging markets, both as an investment alternative and as a safe haven against volatile domestic currencies. Yet the promise of a new, more equitable financial order has not been realized.

“Cryptoassets hold out the illusory appeal of being a simple and quick solution for financial challenges,” the paper said. “However, cryptoassets have so far not reduced but rather amplified the financial risks in less developed economies.”

For instance, the higher risk of sovereign default and the lack of strong central banks or financial institutions in emerging markets could undermine the value of the domestic currency and push citizens to buy cryptoassets, it said.

Scams and fraud are more common in cryptoasset markets, the paper said, and a weak rule of law can make it tough to enforce contracts and property rights.

“A lack of clear regulation and inconsistent enforcement can create confusion and raise market risk,” it stated.

Low financial literacy combined with technological knowledge in emerging markets can also “create a potent catalyst for risks to financial stability, especially concerning cryptoassets,” it said.

In the face of these risks, policymakers have a number of options, the paper said, from outright bans on crypto to containment and regulation.

However, it also acknowledged that if policymakers are too restrictive, they may drive the activity underground, making it more difficult to influence responsible market participants and preventing useful innovation.

“While crypto-related activities have not fulfilled their stated goals to date, the technology could still be applied in various constructive ways,” the paper concluded. “Creating a regulatory framework to channel innovation into such socially useful directions will remain a key challenge in future.”