Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
BIS Publishes Report Highlighting the Key Elements and Risks of the Crypto Ecosystem
Report | July 11, 2023
The Bank for International Settlements' report provides an in-depth analysis of the crypto ecosystem, highlighting its key elements, inherent structural flaws, and associated risks, while discussing potential strategies to address these challenges.
- The Bank for International Settlements (BIS) submitted a 30 page comprehensive 'Crypto Ecosystem' report to the G20 Finance Ministers and Central Bank Governors in July 2023. The report delves into the intricate workings of the crypto ecosystem, highlighting its key components such as Bitcoin, blockchain technology, stablecoins, and decentralized finance (DeFi). It also underscores the inherent structural flaws and risks associated with the crypto ecosystem, including fragmentation, congestion, and the need for borrowing credibility from sovereign money.
Structural Flaws and Risks
- The crypto ecosystem suffers from inherent limitations of permissionless blockchains that lead to fragmentation of the system, accompanied by congestion and high fees.
- The BIS explains that the limitations are not technological but rather stem from incentive structures.
- Validators must be incentivized through sufficiently high monetary rewards to report truthfully and sustain the system of decentralized consensus. This leads to congestion and high fees, making crypto-based payment systems comparatively slow and expensive.
- Despite the original ethos of decentralization, crypto and DeFi often feature substantial de facto centralization, which introduces various pain points. A prime example concerns stablecoins, which piggyback on the credibility of the central bank’s unit of account and may pose risks to monetary sovereignty.
- The report identifies several risks within the crypto ecosystem, including risks to market integrity, consumer protection, and privacy.
- It also highlights risks specific to DeFi arising from the interconnectedness with the traditional financial system.
- For instance, DeFi activities almost exclusively involve exchanging one stablecoin or crypto coin for another, and do not finance activity in the real economy. This self-referential system is mostly used for speculation in coins, posing substantial risks to investors, especially retail investors.
See: BIS Publishes Report on Options to Address Crypto Risks: Ban, Contain, Regulate, Or?
Addressing the Risks
- While it doesn't provide specific solutions, it implies that regulatory oversight and consumer protection measures could be part of the approach.
- The report also identifies data gaps that currently hinder monitoring of the crypto ecosystem. It suggests that addressing these data gaps would be crucial for understanding and managing the risks associated with crypto.
Conclusion
The BIS concludes that despite some elements of genuine innovation, the inherent structural flaws of the crypto ecosystem make it unsuitable to play a constructive role in the monetary system.
Download the 30 page PDF report --> here
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