The rapid rise of digital finance is reshaping the global financial landscape, and at the heart of this transformation lies the growing adoption of crypto assets. A recent report from the Bank for International Settlements (BIS) highlights both the opportunities and risks associated with this shift—particularly in emerging market economies (EMEs). While crypto assets have not reduced financial risks in these markets, the report emphasizes that effective regulation—not outright bans—should be the guiding response.
The Surge in Crypto Asset Adoption
Digital innovation continues to open new pathways for financial activity, promising significant and swift changes to the financial system. One of the most notable developments is the expansion in the scale and scope of crypto assets. In 2021, both public interest and market capitalization surged across advanced economies (AEs) and emerging markets.
Proponents argue that crypto assets offer lower transaction costs, faster payments, decentralization, anonymity, and potentially high investment returns. At its peak in November 2021, the total market value of crypto assets reached approximately $3 trillion. However, the bubble burst in early 2022, triggered by the collapse of TerraUSD—the then third-largest stablecoin. The sector lost nearly two-thirds of its value. The situation worsened in November 2022 when FTX, one of the world’s largest crypto exchanges, filed for bankruptcy, plunging the market into a prolonged "crypto winter."
Although these shocks had limited spillover effects on traditional financial systems, policymakers are increasingly concerned about what might happen if crypto and conventional finance become more deeply intertwined in the future.
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Financial Stability Risks in Emerging Markets
In emerging market economies, crypto adoption is steadily increasing. For some users, these assets serve as alternative savings and investment tools. For others, they appear to offer a hedge against volatile local currencies. This growing reliance raises red flags for financial authorities who must monitor crypto markets and assess their potential impact on broader financial stability.
To address these concerns, the BIS’s Committee on Regional Consultation for the Americas (CCA) established a consultative group on financial stability (CGDFS), which formed a dedicated task force to examine crypto-related financial stability risks—with a special focus on EMEs. The group also explored potential policy guidelines to mitigate these risks.
Key Financial Risks Posed by Crypto Assets
- Market Risk: High price volatility can lead to significant losses for investors with direct or indirect exposure to crypto markets.
- Liquidity Risk: Lack of transparency in operations and concentration of trading on a few major platforms expose investors to liquidity shortfalls.
- Credit Risk: Weak governance, lack of accountability, and excessive leverage in decentralized markets can amplify credit risk.
- Operational Risk: Dependence on networks and smart contracts makes crypto systems vulnerable to cyberattacks and technical failures.
- Currency Substitution Risk: Widespread adoption could lead users to shift funds from bank deposits to crypto, resulting in bank disintermediation.
- Capital Flow Risk: Use of crypto for cross-border payments may complicate capital flow management and macroeconomic stability.
These vulnerabilities can transmit financial stress through several channels: direct ownership, use as collateral, confidence effects, wealth effects, and indirect linkages via entities engaged in crypto activities. The intensity of these transmission mechanisms depends on three key catalysts identified in the report: the economic and financial environment, technological penetration, and regulatory stance.
Building Effective Regulatory Frameworks
The BIS report stresses that regulators face a spectrum of policy choices—from outright bans to containment or proactive regulation. While bans may prevent some risks, they also carry downsides: driving activity underground and making it harder for responsible participants to operate. Instead, the report proposes three core principles for developing sound regulatory frameworks.
1. Establish Clear Regulatory Mandates
Regulatory and supervisory authorities must coordinate to clearly define roles and responsibilities. This includes assessing whether existing laws—covering anti-money laundering (AML), counter-terrorism financing (CFT), cybersecurity, digital identity, and data protection—are compatible with the emerging crypto landscape.
Central banks and financial regulators may need new mandates to oversee crypto-related entities such as exchanges. A unified approach ensures accountability and reduces regulatory gaps.
2. Implement Activity-Based vs. Entity-Based Regulation
The report advocates for a principle of “same risk, same activity, same regulation.” This means regulatory standards should be based on the nature of the financial activity—not just the type of entity performing it. Whether a service is provided by a traditional bank or a decentralized protocol, if it performs a similar function (e.g., lending, custody, trading), it should face equivalent oversight.
This approach prevents regulatory arbitrage and ensures a level playing field across the financial ecosystem.
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3. Close Critical Data Gaps
One of the biggest challenges for regulators is the lack of transparent, consistent, and reliable data on crypto markets. Although blockchain transactions are publicly recorded, identifying counterparties remains difficult due to pseudonymity and decentralization.
These data gaps limit authorities’ understanding of market structure and dynamics, making it harder to monitor trends and assess systemic risks. The BIS calls for improved data collection mechanisms—potentially through mandatory reporting by regulated entities and enhanced international cooperation.
The Path Forward: Responsible Innovation
The BIS acknowledges that responsible innovation, new technologies, and emerging participants can reduce friction in payment systems, improve efficiency, and lower barriers to financial inclusion. Historically, technological advances have driven improvements in financial services resilience.
While crypto-related activities have yet to fully deliver on their original promises—such as enhancing financial stability in emerging markets—the underlying technology still holds transformative potential. The key challenge ahead is designing regulatory frameworks that channel innovation toward socially beneficial outcomes without stifling progress.
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Frequently Asked Questions (FAQ)
Q: Do crypto assets reduce financial risks in emerging markets?
A: According to the BIS report, they do not. In fact, they may introduce new sources of instability due to volatility, opacity, and weak governance.
Q: What is the recommended approach to regulating crypto assets?
A: The BIS supports effective regulation over outright bans. Key elements include clear mandates, activity-based oversight, and better data collection.
Q: Can decentralized finance (DeFi) be regulated effectively?
A: Yes—but it requires adapting regulatory frameworks to focus on financial functions rather than organizational forms. “Same risk, same activity” principles apply even in decentralized environments.
Q: What role do stablecoins play in financial stability risks?
A: Stablecoins like TerraUSD have shown that without proper oversight, even assets designed to be stable can trigger systemic crises when they lose their peg or face redemption runs.
Q: How can regulators monitor decentralized networks?
A: By focusing on on-ramps and off-ramps (e.g., exchanges), requiring transparency from service providers, and leveraging blockchain analytics tools to track flows and exposures.
Q: Is banning crypto a viable solution for emerging markets?
A: The BIS warns against blanket bans. They may push activity underground, reduce oversight, and hinder innovation that could benefit financial inclusion.
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