BIS Report: Crypto Now Big Enough to Threaten Financial Stability
Key Takeaways
- BIS flags growing crypto-TradFi links, citing Bitcoin ETFs and tokenization as catalysts.
- Wealth inequality may worsen as retail investors enter during downturns while the rich exit.
- BIS calls for tighter DeFi regulation with KYC, disclosures, and risk frameworks.
The Bank for International Settlements (BIS) has issued a detailed report stating that cryptocurrencies and DeFi have reached a critical mass, making them potential contributors to financial instability.
Once considered niche and disconnected from traditional finance (TradFi), the evolving crypto landscape is now creating deeper integration with the broader financial system, particularly through the introduction of spot Bitcoin ETFs and the tokenization of RWAs.
The report, co-authored by BIS economist Raphael Auer, highlights that these developments are reshaping exposure levels among traditional institutions. With brokers and asset managers increasingly entering crypto markets, the once-clear line between TradFi and DeFi is fading.
More concerning is that the surge in retail investor activity during market declines contrasts with institutional exits, raising concerns of wealth flow from less wealthy entrants to earlier, often wealthier, adopters.
BIS identified four transmission channels that pose a risk to financial stability: direct TradFi exposure to crypto products, market confidence shocks, wealth volatility due to price swings, and the use of crypto for payments and settlements. These channels, while not yet causing systemic tremors, are fast becoming conduits for future risk amplification.
Wealth Divide Deepens via Crypto Participation
One of the reports more provocative observations is that crypto may be increasing wealth disparity. Auers group shared data revealing retail investors generally add exposure to the market under stress, but institutional investors cut theirs.
This behavioral divergence can result in losses that disproportionately fall on smaller investors.
Reflecting similar views, European Central Bank official Ulrich Bindseil previously commented on how those early crypto adopters, who are typically from wealthier groups, gain at the expense of others who adopt it late.
Although the reasons and mechanisms are different, both positions lead to the same conclusion: the cryptocurrency industry, left alone, might become a system to transfer wealth to favor the rich.
Regulating DeFi: Containment Without Curtailment
Instead of calling for an outright prohibition, BIS espouses a contain and regulate stance. The authors hold that delivering TradFi-style compliance, including KYC requirements, transparency obligations, and licensing, to DeFi has the potential to mitigate spillover risk to the overall economy.
The UKs proposal to introduce a new category of law to regulate protocol operators is an illustration of the increasing international pressure to establish accountability within decentralized systems.
The report emphasizes tokenization of RWAs can bring traditional players into DeFi more deeply, expanding systemic risk. In addition, since stablecoins are at the heart of DeFi activity, potential destabilization thereof deserves keen regulatory attention.
Lastly, the report warns of the rising reliance of emerging markets on crypto, a phenomenon referred to as cryptoisation, as an increasing risk necessitating collective international policy response.
Related Reading | TRM Labs: DeFi Gains Traction in Yemen as Traditional Banking Faces Sanctions Pressure
Read more: https://www.tronweekly.com/bis-report-crypto-now-big-enough-to-threaten/
Text source: TronWeekly
