In a new report, the Bank for International Settlements (BIS) warns of potential systemic risks arising from the growth of cryptocurrencies and decentralized finance (DeFi).
Systemic Risks to Traditional Finance
The BIS indicates that the connection between cryptocurrencies and traditional financial institutions is deepening due to recent developments like the approval of spot Bitcoin ETFs and the rise of real-world asset tokenization. These changes require stricter oversight.
Impact of Financial Shocks on Inequality
The report also highlights that financial shocks in cryptocurrency markets can exacerbate wealth inequality. According to the BIS, during market stress, small individual investors tend to increase their crypto exposure while wealthier investors exit the market, resulting in a redistribution of wealth from poorer to richer.
BIS Recommendations for DeFi Regulation
The BIS advocates for measures to mitigate potential risks, including aligning DeFi protocols with existing regulatory frameworks applied to traditional financial organizations. This includes implementing Know Your Customer (KYC) rules, enhanced disclosure requirements, and establishing legal responsibilities for those operating decentralized protocols.
In conclusion, the BIS report emphasizes the need for careful monitoring of the implications of cryptocurrency and DeFi growth in the traditional financial system, while proposing countermeasures to protect investors.
