Cryptoassets increase risk in developing economies, study says

FILE PHOTO: Illustration shows representations of cryptocurrencies

NEW YORK (Reuters) - Cryptoassets, peddled as the future of finance, have not only failed to deliver on their promise but are themselves adding to financial risks in developing economies, according to a paper from the Bank for International Settlements.

"Cryptoassets hold out the illusory appeal of being a simple and quick solution for financial challenges" especially in emerging markets, but "have so far not reduced but rather amplified the financial risks in less developed economies," the BIS report showed.

The report looks at what would happen if crypto and traditional financial markets become more integrated in the future, with a focus on possible financial stability risks as cryptoassets "should be assessed from a risk and regulatory perspective like all other assets."

The risks are multi-fold, with cryptoasset vulnerabilities stemming from the nature, structure, composition and function of those markets.

As a potential way forward, the paper argues, national authorities can cooperate to define the data they need to monitor the market effectively, "with an emphasis on the identification of critical connections points with financial institutions and core market infrastructures."

However this comes with disclosure elements that go against the anonymity that drives some people and entities to crypto assets in the first place.

The report's guidelines for regulating and supervising cryptoasset markets include bans, containment and regulation.

"Given the offshore and pseudo-anonymous nature of cryptoasset markets, an outright ban might not prove enforceable," read the BIS paper.

"On the contrary, policymakers would lose all sight of these markets, making these markets even less transparent and predictable. In addition, all potential innovation gains from cryptoasset markets would be lost."

Keeping control on the flows between traditional financial systems and cryptomarket assets, or containment, hits similar hurdles as a ban as "controlling funds might not be feasible in practice."

Regulation, the paper argues, comes with varying motivations across jurisdictions and adds the problem of gaps in data, where disclosure again plays a big part.

Earlier this year, the financial services chief of the European Union said the rest of the world should copy EU rules for cryptoassets to create a global approach that protects consumers and financial stability.

About two dozen central banks across emerging and advanced economies are expected to have digital currencies in circulation by the end of the decade, according to a BIS survey published last month and conducted late last year.

(Reporting by Rodrigo Campos, Editing by Nick Zieminski)