BIS Releases 3 Options For Addressing The Risks In Crypto

Key Points:

• The global group of central bankers recommended three options to tackle dangers in crypto markets, including banning, containing and regulating.
• Central banks might create their own digital currency to encourage sound innovation, according to BIS research.

Following a particularly volatile year, the Bank of International Settlements (BIS) says that authorities can adopt one of three approaches to cryptocurrency: regulate, contain, or call for a complete ban of the sector.

According to a paper on tackling risks in crypto issued on Thursday, the global group of central bankers also proposed an option to encourage sound innovation with Central Bank Digital Currencies.

The BIS underlined the benefits and cons of each of the three techniques, noting that they could be combined and matched to address different risks. The primary incidents noted were the ongoing story surrounding the collapse of FTX and the breakdown of the stablecoin TerraUSD.

Without such gateways, crypto would have to rely on users taking self-custody of their funds in digital wallets using private keys. Given the risks involved, mainstream adoption would be inconceivable.

The report said

Banning crypto activities would be an extreme option that would impede innovation. The BIS admits that prohibiting borderless decentralized activity is problematic. A prohibition on centralized middlemen might be more effective, but it may shift such operations to another state.

In terms of pros, and assuming that a ban is effective, any potential harm to the financial system would be eliminated and investors would not incur any losses due to misconduct on the part of crypto service providers. The main downside is that any useful innovation from crypto would be lost or delayed.

Other options include isolating cryptocurrency from traditional financial economies and regulating the industry in a manner similar to the financial services sector.

If this option is successfully pursued, problems stemming from and propagating within the crypto markets would not damage TradFi. Importantly, this option would avoid giving crypto a “seal of approval”, which might encourage its growth.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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