BIS Publishes Report on Options to Address Crypto Risks: Ban, Contain, Regulate, Or?

Ledger Insights | Jan 12, 2023

BIS Options to ban contain regulate crypto - BIS Publishes Report on Options to Address Crypto Risks:  Ban, Contain, Regulate, Or?

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The Bank for International Settlements (BIS) published a brief paper exploring the options to address the risk of cryptocurrencies, or as it likes to call them, crypto-assets.

  • Heightened Risks:  It argues that cryptocurrencies feature many of the risks of TradFi, but while similar, the risks tend to be exaggerated. These include the extensive use of leverage, liquidity and maturity mismatches, and significant asymmetries in information.
    • The BIS report highlights that DeFi often is not decentralized because founders have significant token stakes or others can acquire major influence.
    • It also points to the critical roles of centralized cryptocurrency exchanges as crypto onramps.
    • Another observation we have is that decentralized wallets increasingly enable direct onramps using credit cards which over time may partially erode the onramp role of exchanges.

See:  BIS Limits Banks to Hold 1% of Reserves in Bitcoin –> “Banks Won’t HOLDL”

  • The three direct routes to control crypto risks are to ban, contain, or regulate it.
    • The BIS recognizes that banning it may not be acceptable for free societies. Also, bans can be circumvented and it could inhibit innovation.
    • By containing crypto the BIS means ringfencing crypto, so the minimal overlap with TradFi is maintained.
    • Regulate. A common approach is mapping crypto activities to conventional activities to apply the same risks and rules. But the mapping is not always straight forward. For example, some jurisdictions will regulate stablecoin issuers as banks, some as payment systems and others as banks. A second challenge is identifying the entity in a decentralized world.

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