Crypto bans in emerging economies might be unenforceable, warns Bank of International Settlements

The Bank of International Settlements (BIS) believes that cryptocurrencies in emerging economies should be assessed with risk and regulation because they’ve been seen as a cheap and simple solution for financial challenges.

In a recent paper, the BIS highlighted potential risks associated with how crypto interacts with emerging economies. The bank also offered guidelines for these economies to help them regulate crypto effectively and protect their citizens.

Crypto is technology dependent, the BIS noted, saying that emerging economies could be at risk for cyber-related attacks due to “relatively low and unequal technological development.”

Mixing technological concerns with a lack of financial literacy could create a worrisome cocktail, as there’s an inherent need to understand both components.

“This can lead to a range of issues such as high levels of debt, improper investment choices and vulnerability to predatory practices,” while the lack of financial literacy can lead to “shocks.”

The BIS pushes for emerging economies to take account activity and entity-based regulation into account. Essentially, an activity-based regulatory structure aims to regulate ”a systemically important activity directly, by constraining entities in their performance of that activity alone.”

However, entity-based regulation primarily targets the entities carrying out the activities that the economy seeks to regulate.

“The combination of activities leads to a mix of risks, including liquidity transformation and leverage,” the BIS warned.

It did note that there could be a compromise of the two regulatory approaches, which would ensure that crypto entities could beef up their war chests during bullish cycles to prepare for possible downturns.

A blanket ban on crypto “might not prove enforceable” due to the “offshore” nature of crypto, the BIS warned. It would also make the markets less transparent as policymakers would “lose all sight of these markets.”

International coordination is one of the top suggestions the BIS makes, but it’s not a new suggestion. Across the world, regulatory bodies and policymakers are looking into how joint collaborations could help crack down on crypto crimes, while also monitoring developments across crypto.

“A potential next step may be for authorities to collaborate on the establishment of a shared data repository where key information such as crypto-related activity and exposures of financial institutions, among others, would be stored,” the BIS suggested.

Outside of regulatory frameworks, the BIS is also focusing on how central bank digital currency (CBDC) systems could interact with economies, noting that 93% of banks are exploring potential CBDCs.

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