Prohibit, contain, regulate: three approaches suggested by the BIS to prevent the 2022 collapse from happening again
- Cryptocurrencies should be banned, isolated or regulated, BIS says
- Are CBDCs a real alternative to banning cryptocurrencies?
The Bank for International Settlements (BIS), a global banking coordination body and “central bank of central banks”, has released a bulletin to summarize approaches to regulating cryptocurrencies in 2023.
Cryptocurrencies should be banned, isolated or regulated, BIS says
In his recent skeptical thesis Dealing with Risks in Cryptocurrencies: Defining Your Options, the Bank for International Settlements (BIS) has declared that after the FTX/Alameda drama, regulators can no longer ignore cryptocurrencies.
The authors said the FTX crash demonstrated that decentralization in cryptocurrencies is often delusional: governance is concentrated in most DeFis. As such, the industry is not yet ready to be fully autonomous.
The segment is exposed to many vulnerabilities from the TradFi sphere, while the specificities of cryptocurrencies amplify the risks. Thus, leaving cryptocurrencies without proper regulation becomes increasingly dangerous for retail investors:
Several crypto business models have turned out to be real Ponzi schemes. These features, coupled with the huge information deficit clients face, severely undermine investor protection and market integrity
BIS officials propose three models (“approaches”) of how states can deal with cryptocurrencies. First, they can ban cryptocurrencies completely to eliminate all associated risks. It will protect investors from scams and greatly increase the stability of financial systems. However, bans on cryptocurrencies could be circumvented, not to mention conflict with the founding principles of society.
Hence, regulators can insulate cryptocurrencies from TradFi (the “Contain” strategy). BIS experts admit that such isolation is impossible in 2023, while it will not better protect investors.
Are CBDCs a real alternative to banning cryptocurrencies?
Finally, governments can regulate cryptocurrencies in a similar way to traditional financial institutions. “Responsible gamblers” will benefit from proper regulation. Meanwhile, the nature of the DeFi segment makes finding “points of reference” (responsible persons or legal entities) a challenging task.
In conclusion, BIS experts mentioned a number of “alternatives” outside of Web3 that can be as fast and cheap as DeFi protocols. First, they are next-generation digital remittance frameworks like SEPA in Europe or FedNow in the US.
Additionally, governments can protect people from exposure to cryptocurrency risks by launching viable and easy-to-use central bank digital currencies (CBDCs). Thus, TradFi can adopt the most impressive elements of DeFi design, including programmability, composability, and tokenization.
As U.Today previously reported, amid the Q3 2022 crashes of centralized crypto services Celsius, Voyager, and Three Arrows Capital and painful Bitcoin (BTC) price drops, the BIS admitted the worst had materialized. “crypto alerts”.