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Economists at the Bank for International Settlements (BIS) have examined the risks inherent in the crypto ecosystem and come up with a seemingly novel solution. They advised “developing alternatives” in a bulletin published Jan. 12. They had a central bank digital currency (CBDC) in mind.
The authors of the bulletin, led by BIS senior economist Matteo Aquilina, said they sought lessons from the 2022 crypto winter. Recent failures in cryptocurrency markets underscore the need to address the risks posed by cryptocurrencies before those markets become “systematic.” ,” they said.
Both centralized and decentralized finance in the crypto world “share many of the familiar vulnerabilities of traditional finance (TradFi),” the authors said. However, the risks stemming from high leverage, liquidity, maturity mismatches, and substantial information asymmetries are greater for cryptocurrencies.
Despite the problems, the authors point out that cryptocurrencies are unlikely to die out on their own. They listed potential risk mitigation measures as banning certain crypto-activated things, containing cryptocurrencies separate from the “real economy,” and regulating cryptocurrencies “in a TradFi-like manner.” Categorized into categories of things to do. They provide separate appendices that analyze national and international crypto regulatory initiatives within their framework.
Related: Central Bank Sets Standards for Banks’ Crypto Exposure: BIS
Each option has relative strengths and weaknesses, they point out. For example, a ban might be “may conflict with the basic principles of society”. However, you can also pursue all three approaches simultaneously.
“Given their public policy mandate, central banks may want to do more. By fostering healthy innovation at TradFi, we can contribute to a more efficient monetary system.” ”
Improving payment speed and cost efficiency could be key elements of that strategy.
“We can take advantage of the innovations that exist in certain areas of cryptocurrency to improve the way we serve on TradFi.”
One of the best ways to do that is with CBDC. The authors claim that CBDC has many benefits.
“It could help reduce payment costs, enhance financial inclusion, strengthen system integrity, and facilitate user control over data and privacy.”
International and supranational organizations have provided platforms for responding to the growing opposition to cryptocurrencies. European Central Bank (ECB) board member Fabio Panetta recently made a similar argument to develop his CBDC at the expense of cryptocurrencies. Just before that, the same ECB blog had posted an article claiming that cryptocurrencies were on a “road to meaninglessness.” The International Monetary Fund (IMF) has also been criticized for its anti-cryptocurrency stance.
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