Bank for International Settlements weighs in on crypto risks

By John Bassilios 

The Bank for International Settlements has released a bulletin, 'Addressing the risks in crypto: laying out the options' (12 January 2023). The bulletin highlights the risks and failures that have taken place in the crypto market in recent years. In an effort to address these risks before they become systemic, the bulletin outlines three potential lines of action: ban, contain or regulate. In this article, we unpack what each option would mean for the industry.

What is the Bank for International Settlements?

The Bank for International Settlements (BIS) is owned by numerous central banks and represents countries from around the world that together account for about 95% of world GDP. The mission of the BIS is to act as a bank for central banks and to support the pursuit of monetary and financial stability through international cooperation. As part of its mission, the BIS seeks to provide strategic insights and responses to core policy issues.

BIS focus on crypto

The BIS website has a section dedicated to innovation and fintech, which provides access to research, speeches and publications on the topic of crypto and digital assets.

The bulletin states that the risks from crypto markets have become a more pressing policy issue due to the scale and prominence of recent failures.

What are the three options?

The bulletin considers that addressing crypto risks should have the same objectives as traditional finance, which are typically to:

• appropriately protect consumers and investors;
• preserve market integrity against fraud, manipulation, money laundering and the financing of terrorism;
• safeguard against financial stability; and
• for central banks, preserve the integrity of the monetary system.

The options presented in the bulletin are to:

1. ban specific crypto activities (Ban): this is the most extreme option and would be challenging to enforce. It could also result in useful innovation being lost or delayed.
2. isolate crypto from traditional finance and the real economy (Contain): this could be done by limiting the flow of funds into and out of cryptocurrency and limiting other connections with traditional finance (for example, this could seek to curb the use of crypto-assets as payment for goods and services).
3. regulate the sector in a manner akin to traditional finance (Regulate): the bulletin suggests that this could involve authorities taking a ‘functional’ approach by identifying the key economic functions performed by crypto activities and assessing how it would be impacted by regulation.

Options applied worldwide

The online appendix to the bulletin identifies the options applied in ongoing initiatives internationally and demonstrates that most jurisdictions (EU, UK and US authorities) have taken a ‘regulate’ approach, although Chinese authorities have taken a ‘ban’ approach.

Australia has also taken a ‘regulate’ approach, beginning with its commitment to token mapping and consultation on a custody and licensing framework for crypto services providers.