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A recent study conducted by the Bank for International Settlements (BIS) has highlighted that, contrary to expectations, cryptocurrencies like Bitcoin have increased financial risks in developing nations rather than mitigating them.
Released by the Consultative Group of Directors of Financial Stability (CGDFS) on August 22, the report examines the impact of cryptocurrencies on emerging markets. The collaborative effort involves central banks from countries including Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the U.S. It's important to note that the opinions expressed in the report represent the authors' views and not necessarily those of the BIS.
In many emerging markets, cryptocurrencies are seen as potential solutions to financial challenges. They are often promoted as affordable payment methods, alternatives to traditional financial systems, and substitutes for currencies in economies grappling with high inflation or volatile exchange rates. The study underscores that regulatory authorities can adopt various approaches, ranging from direct bans to more nuanced regulatory measures, to address the growing concerns about financial stability caused by these digital assets.
The report also cautions against overly restrictive policies by central banks and regulators, as such measures could drive crypto transactions into unregulated spaces. Despite acknowledging that cryptocurrencies have not fully realized their potential, the authors believe that the underlying technology holds promise. The real challenge lies in establishing a regulatory framework that channels this innovative potential in ways that benefit society.
The study also identifies potential risks associated with Bitcoin exchange-traded funds (ETFs) in these markets. While such products make market entry easier for inexperienced investors, they may also amplify risk exposure. The report specifically highlights the danger of significant losses for Bitcoin ETF investors, even if they don't own actual cryptocurrency assets. Moreover, ETFs linked to crypto futures could exacerbate risks if they dominate a significant portion of the futures market.
This study echoes concerns raised in a previous BIS report from July, which also expressed worries about the stability of stablecoins and the perceived inflexibility of smart contracts. In contrast, the BIS maintains a positive outlook on central bank digital currencies, viewing them as foundational for future financial innovations.
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