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A new study from the Bank for International Settlements (BIS) indicates that rather than alleviating financial strain, cryptocurrencies may potentially heighten risks in developing nations.
Recently, the Consultative Group of Directors of Financial Stability rolled out a detailed analysis on the impacts of cryptocurrencies in emerging markets. The study involved insights from central banks of nations like Mexico, Brazil, Argentina, Chile, Peru, Colombia, Canada, and the U.S. The paper underlined that its content represents the perspective of the writers and not essentially the BIS.
The research portrays that cryptocurrencies like Bitcoin might appear promising in addressing fiscal challenges in budding markets. These digital currencies were initially introduced as cost-efficient payment systems, alternatives for financial system access, and replacements for national currencies, especially in countries grappling with high inflation rates and unstable exchange rates.
However, the report accentuates that these digital assets may have inadvertently exacerbated the economic challenges in emerging markets. There's a spectrum of policy interventions available to address these challenges, from outright prohibitions to containment strategies and regulations.
The report points out potential pitfalls if regulators adopt too strict approaches, suggesting that overly restrictive policies could push crypto activities underground.
Despite these concerns, the study acknowledges the potential of blockchain technology. It highlights that the challenge remains in molding a regulatory framework that channels this innovation for the broader societal good.
Furthermore, the study raises alarm bells regarding Bitcoin exchange-traded funds (ETFs) as a significant risk. The ease with which these products allow entry might inadvertently escalate risks, especially for novice investors. The research suggests that Bitcoin ETF investors could encounter hefty losses even without owning any crypto assets, primarily if the Bitcoin price dives. Moreover, crypto futures-based ETFs could also introduce increased market volatility.
The BIS remains reserved in its stance on the uptake of cryptocurrencies. Another of its reports in July was highly critical of digital currencies, underscoring the instability of stablecoins and other concerns.
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