The prominent international banking institution recommends banning, containing, or further regulating the digital asset space to avoid FTX-style collapses affecting the traditional finance space.
Focusing on the dangers the digital asset space poses to ‘traditional finance,’ the report notes how digital asset markets have gone through booms and busts previously that have not led to wider contagion or broader financial stability, but that “the scale and prominence of recent failures heighten the urgency of addressing these risks before crypto markets become systemic.”
In a fairly scathing assessment of recent activity in the digital asset space, the institution also highlights that “several business models in crypto turned out to be outright Ponzi schemes.”
To face the threat from this volatile sector, the BIS concluded that three, not mutually exclusive, lines of action could be pursued to “mitigate the risks emanating from crypto activities”: Ban specific digital asset activities (“ban”); isolate digital assets from traditional finance and the ‘real economy’ (“contain”); and regulate the sector in a manner more in line with the traditional finance sector (“regulate”).
If the recommendations were to be taken up by central banks globally, banning digital assets is likely to be a last resort option and the most difficult to enforce as the industry is now valued at just under $1 trillion globally. Isolating would also be a complex route, with interconnections increasingly common amongst investors but also states El Salvador and Brazil being the most prominent examples of national economies intertwining with digital assets.
The report added that a key element to be considered when selecting which options to follow would be the ability to enforce any rule that is introduced, and the most ‘enforceable’ and straightforward of the three policy approaches to institute would naturally be the regulation route—an area in which many countries and economic blocks are already making progress.
The EU is awaiting the Markets in Crypto-Assets (MiCA) regulation, which is likely to come into force in 2024 and brings with it classifications of different digital assets as well as regulatory regimes adapted to different assets; the U.K.’s Financial Conduct Authority (FCA) is bringing in several new digital assets laws, including financial promotion and stablecoin legislation, and in the U.S. the Digital Commodities Consumer Protection Act (DCCPA) will further clarify enforcement jurisdictions for regulators.
The organization behind the report, the BIS, is an international financial institution owned by a number of central banks and established in 1930 by an intergovernmental agreement between Germany, Belgium, France, the U.K., Italy, Japan, the U.S., and Switzerland.
Outside of its advice regarding digital assets, the institution also suggested that central banks and public authorities should work to make traditional finance more attractive in an attempt to win investors and consumers back from DeFi. One method mentioned was encouraging innovation with central bank digital currencies (CBDCs), an increasingly popular concept amongst central banks globally.
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