The week, the BIS, the central bank of central banks, published an article exploring the risks of financial stability of cryptocurrencies and decentralized finances (DEFI). Although it is a subject that has been covered several times, in particular by some of the same authors a few years ago, the document is articulated and fresh. Most central bankers have argued that cryptocurrency is too small and independent therefore does not yet have a risk of financial stability. This report indicates that the cryptography market has “reached the critical mass”, although it always considers it as having minimum links with traditional finance (tradfi). However, the publication of FNB Bitcoin and the expansion of tokencoins and the tokenization of active active world (RWA) change this.
Transfer of wealth from the poor to the rich?
It also included a remarkable graphic showing that during crises, small investors increase their exhibitions to cryptography, while the richest come out. Consequently, they conclude that the cryptography market can be “a means of redistributing the richness of the poorest to the richest”.
We note that another central banker, Ulrich Binseil of the ECB, made the same observation but for a different reason. He considers Bitcoin as the redistribution of the wealth of late investors to the ancients, who tend to be rich.
Cryptic overflow effects
The 2023 financial stability document concluded that crypto’s political approaches could take three forms: prohibiting, containing or regulating, suggesting that a prohibition would be a bad idea. The article of this week starts from this perspective and explores the commercial risks and the extent to which they exist in the Crypto and Defi worlds.
From the point of view of financial stability, he sees four “transmission channels” which introduce the risk:
- Tradfi exhibitions to crypto, products related to cryptography or other entities with exhibitions
- Confidence effects
- Effects of the richness of price movements
- The use of the crypto in payment or in payment.
He also had three other concerns. Beyond the crypto, Tradfi could start using Smart DEFI contracts within Tradfi. There is the potential cryptocal of emerging market economies, where residents flee local volatile currencies for stablecoins or crypto. In addition, even if Defi has no impact currently on the broader economy, the authors want to “protect the interest of market players in Defi”.
Links between crypto, deffi and tradfi
The authors noted two main ways that the Crypto and Tradfi link develops. First, in January 2024, the American sec authorized the issuance of FNB Bitcoin. This facilitated an exhibition at the crypto. In addition, tradfi asset managers and brokers are now more involved.
The second is the tokenization of active world active. Today, Defi is largely based on crypto. But the tokenization will extend the range of assets to include more traditional assets. In addition, decentralized exchanges (DEX) could start to be used more widely by Tradfi companies and “be part of the dominant current”.
Consequently, the authors claim that an “confinement” approach is justified to ensure that Tradfi companies properly assess risks. We observed that an example of this is the rules of Basel Crypto of Basel which currently consider blockchains without authorization as a high risk. Therefore, they discourage banks from getting involved in tokenization on the channels without authorization.
As DEFI becomes more common, the authors propose to impose similar requirements to Tradfi. In particular, this would include the conformity of your client, disclosure and adequate training and qualifications for market professionals. The document highlighted a consultation in the United Kingdom which suggested a new potential legal role of “the establishment or exploitation of a protocol”.
Financial stability – following steps
There have been a lot of debates on how to regulate Defi. Consequently, the conclusion of the document suggests new research in exploring the role of the decentralized autonomous organization (DAOS) in governanceHow it has an impact on financial stability and how regulators could engage. When you describe the operation of DEFI, the authors note the difference between a DEFI protocol and an application, which generally has a user interface and has a “centralization vector”. In other words, DAPPs are potential regulatory contact points.
The authors consider research on the implications of financial stability of Rwa tokenization As an absolute priority, including the systemic risks of stricter links between DEFI and Tradfi.
They also see stablecoins as having a central role in DEFI and their potential instability is an area requiring more in -depth analysis. Earlier in the newspaper, they noted that instability or disturbances of the payment and settlement system can have the most widespread economic effects on the effects.
Finally, they want to explore how to approach the risks of cryptocurrency for emerging market economies, a subject that the IMF has highlighted for some time.
