To ban, to contain, to regulate: Three approaches suggested by BIS to prevent 2022 collapse from happening again
The Bank for International Settlements (BIS), a global banking coordination body and “central bank of central banks,” has released a bulletin to sum up the approaches to cryptocurrency regulation in 2023.
Crypto should be banned, isolated or regulated, BIS states
In its recent skeptical thesis Addressing the risks in crypto: laying out the options, the Bank for International Settlements (BIS) stated that after the FTX/Alameda drama, regulators cannot ignore crypto any longer.
The recent crypto market turmoil highlights the urgency of tackling the risks. There are different lines of policy action, including issuing central bank digital currencies to encourage sound innovation. #BISBulletin #Crypto #CBDC #Regulation https://t.co/DnI4GXi35X pic.twitter.com/qVDPSWBBwC
— Bank for International Settlements (@BIS_org) January 12, 2023
The authors opined that the FTX collapse demonstrated that decentralization in crypto is often delusional: governance is concentrated in the majority of DeFis. As such, the industry is not ready to be fully self-governed yet.
The segment is exposed to many vulnerabilities from the TradFi sphere, while the specifics of crypto amplify the risks. Thus, leaving crypto without proper regulation becomes increasingly dangerous for retail investors:
Several business models in crypto turned out to be outright Ponzi schemes. These characteristics, coupled with the huge information deficit customers face, strongly undermine investor protection and market integrity
BIS officers propose three models (“approaches”) of how states can handle crypto. First, they can ban cryptocurrencies entirely to eliminate all associated risks. It will protect investors from being scammed and significantly increase the stability of financial systems. However, crypto bans could be circumvented, let alone they conflict with the founding principles of society.
Then, regulators can isolate crypto from TradFi (the “Contain” strategy). BIS experts admit that such isolation is impossible in 2023, while it will not protect investors better.
Are CBDCs real alternatives to banning crypto?
Finally, governments can regulate cryptos in a manner similar to traditional financial institutions. “Responsible players” will benefit from proper regulation. Meanwhile, the nature of the DeFi segment makes finding “reference points” (responsible persons or legal entities) a challenging task.
Wrapping up, BIS experts mentioned a number of “alternatives” outside Web3 that can be as fast and cheap as DeFi protocols. First, they are new-gen digital remittance frameworks such as SEPA in Europe or FedNow in the USA.
Also, governments can protect people from being exposed to cryptocurrency risks by launching viable and easy-to-use central bank digital currencies (CBDCs). Thus, TradFi can adopt the most impressive elements of DeFi design, including programmability, composability and tokenization.
As covered by U.Today previously, amid the Q3, 2022, collapses of centralized crypto services Celsius, Voyager and Three Arrows Capital and the painful Bitcoin (BTC) price drop, BIS admitted that the worst “crypto warnings” had materialized.