BIS profers possible solutions to address the risks of the crypto markets
The Bank for International Settlements (BIS) has suggested possible solutions to the numerous risks of the crypto industry, including high-profile implosions like the FTX scandal.
BIS says decentralization in crypto is illusory
In its latest bulletin entitled “Addressing the risks in crypto: laying out the options,” the Bank for International Settlements (BIS), an international financial institution owned by central banks, highlights the lessons learned from the high-profile boom and busts of 2022 and suggests three possible lines of action to permanently eradicate the risks in the crypto verse before web3 becomes a threat to global financial stability.
The BIS has also outlined policy actions such as encouraging sound innovation with central bank digital currencies (CBDCs) that could be taken to address the inefficiencies in traditional finance (TradFi) and limit global crypto adoption.
“Following the collapse of several major crypto firms, addressing the risks from crypto markets has become a more pressing policy issue. Cryptocurrency markets have gone through booms and busts before, and so far, the busts have not led to wider contagion threatening financial stability. Yet the scale and prominence of recent failures heighten the urgency of addressing these risks before crypto markets become systemic.”
“Addressing the risks in crypto: laying out the options,” the Bank for International Settlements
The authors note that while the bankruptcies of established projects like LUNA, FTX and others have triggered increased calls for decentralization from blockchain technology proponents, the web3 space may never achieve such a feat.
“The vision of crypto proponents is to do away with financial intermediaries, yet to function and achieve a meaningful scale, crypto markets rely heavily on centralized entities for several reasons. The governance of DeFi protocols is often concentrated. The founding members of a new DeFi solution often amass a large number of so-called governance tokens. Since these tokens are tradeable, any party can in theory acquire a controlling stake in a protocol.”
“Addressing the risks in crypto: laying out the options,” the Bank for International Settlements
The BIS also argued that the increasing roles of centralized exchanges and stablecoins in the industry make true decentralization almost impossible. Most DeFi market participants must first purchase the tokens of these projects with fiat money or stablecoins through CEXs.
Tackling crypto risks: a three-prong approach
The BIS further notes that although the crypto industry has not grown large enough or sufficiently interconnected with TradFi to threaten global financial stability, that narrative could change in the near future if institutional investors keep joining the crypto bandwagon.
Against that backdrop, the organization has outlined three key approaches authorities could follow to effectively nip crypto risks in the bud, including an outright ban, creating policies that isolate crypto from TradFi, and implementing TradFi-type regulations to govern the crypto verse.
“Depending on the targeted features of the crypto world and the relative efficacy of each measure, either as stand-alone measures or in combination, authorities could combine specific bans, containment and regulation. By way of illustration, individual jurisdictions could ban energy-intensive proof-of-work tokens or the distribution of algorithmic stablecoins. Some intermediaries that bridge TradFi and crypto could also be regulated. Other parts of crypto could be isolated as part of a containment strategy.”
“Addressing the risks in crypto: laying out the options,” the Bank for International Settlements
Alternatively, the agency has encouraged central banks to imbue sound innovation and create payment solutions that will offer the masses all the benefits of crypto (cost-efficiency, speed and financial inclusion) without their risks or develop CBDCs that meet real needs. This way, the global demand for crypto will be reduced significantly.
