Appeal of Crypto Is ‘Illusory’ – Boosting Financial Risks of Developing Markets

A recent report published by the Bank for International Settlements (BIS) has revealed that cryptocurrencies may pose financial risks to emerging economies.

Even though some argue that digital assets can help address issues such as high-fee payment transactions and inflation, the report suggests that they cannot solve the financial challenges faced by developing countries.

The report was produced by the BIS’s Consultative Group of Directors of Financial Stability (CGDFS), which has members from Brazil, Canada, and the United States. It is important to note that the opinions expressed in the report are not necessarily the views of the BIS.

The report stated the following:

“Crypto assets hold out the illusory appeal of being a simple and quick solution for financial challenges in EMEs (emerging market economies). They have been promoted as low-cost payment solutions, as alternatives for accessing the financial system and as substitutes for national currencies in countries with high inflation or high exchange rate volatility.”

The same report also revealed this:

“However, crypto assets have so far not reduced but rather amplified the financial risks in less developed economies. Therefore, they should be assessed from a risk and regulatory perspective like all other assets. This will become even more pressing if crypto assets are more widely adopted by retail investors and if links with the traditional financial system increase.”

A recent report has disclosed that developing countries possess several options to reduce the perceived negative impacts of cryptocurrencies. However, the report cautions that a complete prohibition on digital assets may be too severe and lead to unintended consequences.

Authorities can choose from various policy options to address risks associated with crypto assets, including outright bans, containment, and regulation.

If they prove effective, bans and containment may prevent financial stability risks.

But if central banks and regulators react excessively prohibitive, it may drive activities underground and make it challenging to influence responsible actors in the sector. In general, new approaches should not be automatically labeled as ‘dangerous’ solely because they differ from the norm.