The Bank for International Settlements measures crypto risk | Aici

The Bank for International Settlements released a report, ‘Addressing risks in crypto: outlining options’ (12 January 2023). The report highlights the risks and failures that have occurred in the crypto market in recent years. In an effort to address these risks before they become systemic, the report outlines three possible lines of action: prevention, containment or control. In this article, we break down what each option could mean for the industry.

What is the Bank of International Settlements?

The Bank for International Settlements (BIS) is owned by many major banks and represents countries from around the world that account for approximately 95% of the world’s GDP. The mission of BIS is to act as a bank for central banks and to support the pursuit of financial and financial stability through international cooperation. As part of its mission, BIS aims to provide strategic insights and responses to key policy issues.

BIS specializes in crypto

The BIS website has a section dedicated to innovation and fintech, which provides access to research, lectures and publications on the topic of crypto and digital assets.

The report says risks from crypto markets have become a pressing policy issue due to the scale and prominence of recent failures.

What are the three options?

The report considers that dealing with crypto risks should have the same objectives as traditional finance, namely:

  • to adequately protect consumers and investors;
  • maintaining market integrity against fraud, manipulation, money laundering and terrorist financing;
  • protecting financial stability; again
  • for central banks, maintain the integrity of the financial system.

The options presented in the bulletin are:

  1. block certain crypto operations (Block): this is the most extreme option and can be challenging to enforce. It can also cause useful innovation to be lost or delayed.
  2. distinguish crypto from traditional currencies and the real economy (Qukatha): this can be done by limiting the inflow and outflow of funds in cryptocurrency and restricting other connections with traditional currencies (for example, this may seek to prevent the use of crypto-assets as payment for goods and services).
  3. regulate the sector in a manner consistent with traditional finance (Regulate): the report suggests that this may involve authorities taking a ‘proactive’ approach by identifying key economic activities performed by crypto activities and assessing how they will be affected by regulation.

Options are used worldwide

The bulletin’s online appendix identifies options used in ongoing programs around the world and shows that most jurisdictions (EU, UK and US authorities) have taken a ‘regulatory’ approach, although Chinese authorities have taken a ‘preventive’ approach.

Australia has also taken a ‘regulatory’ approach, starting with its commitment to token mapping and consultation on a regulatory and licensing framework for crypto service providers.

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