BIS Says Crypto Assets Create Risks for Emerging Market Economies

The Bank for International Settlements ("BIS") concluded that the use of crypto assets poses particular risks for emerging market economies.

In a report on the evolving landscape of digital finance, BIS said that "cryptoassets have so far not reduced but rather amplified the financial risks in less developed economies." BIS examined numerous risks, including: (i) market risk, "given that the high price volatility of cryptoassets can result in losses for investors exposed directly or indirectly to cryptoasset markets"; (ii) liquidity risks "due to the lack of transparency in cryptoasset operations and the concentration of trading in just a few large crypto exchanges"; (iii) credit risk, "which can materialize through the lack of accountability or sound governance in cryptoasset markets and through the excessive leverage present in decentralised finance (DeFi) protocols"; (iv) operational risks, that "can emerge as cryptoassets are prone to cyber attacks and system failures"; (v) "currency substitution" in which wide adoption of crypto assets can lead to bank disintermediation; and (vi) capital flow risk related to the use for cross-border transfer and payments.

On currency substitution, BIS raised concerns that (i) depositors may prefer digital assets to the use of the local regulated banking system, which would impact banks' ability lend money, and (ii) use of a non-governmental form of money would limit the ability of central banks to control the money supply.

BIS recognized that among the reasons why crypto assets have been successful in emerging economies is the high rate of inflation in those countries, effectively making the local fiat currency less of a "safe" asset.