In a recent report, the Bank for International Settlements (BIS) suggests that the rising popularity of digital currencies could potentially threaten the conventional financial framework and widen the wealth disparity. The number of investors and capital invested in cryptocurrencies and decentralized finance (DeFi) has reached a pivotal stage, with investor protection becoming an increasingly significant regulatory issue.
The BIS report, published on April 15, indicates that the magnitude of the crypto market should raise concerns about its stability, beyond its potential impact on traditional finance (TradFi) and the real economy. The report emphasizes the role of stablecoins as a medium for transferring value within the crypto market and advocates for targeted regulations pertaining to stability and reserve asset requirements. Such regulations would ensure stablecoins can be redeemed for US dollars during periods of market stress.
The BIS report was released in the wake of the US House Financial Services Committee’s approval of the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act on April 2 with a 32–17 vote. The STABLE Act seeks to establish a comprehensive regulatory framework for dollar-denominated payment stablecoins, emphasizing transparency and consumer protection.
In addition to the STABLE Act, the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act was approved by the Senate Banking Committee by an 18–6 vote on March 13. The GENIUS Act intends to establish guidelines for collateralization and enforce full compliance with Anti-Money Laundering laws for stablecoin issuers.
The BIS report also expresses concern that the crypto market could widen the wealth gap by allowing larger investors to exploit the emotions of less experienced retail participants, as seen in the 2022 FTX collapse. It noted that larger Bitcoin holders, known as “whales”, were selling while smaller retail investors, referred to as “krill”, were buying as prices fell.
The report concludes by stating that while DeFi and TradFi share similar economic fundamentals, DeFi’s unique characteristics, such as smart contracts and composability, present new challenges that require proactive regulatory interventions to ensure financial stability and encourage innovation.
