Ban, contain, regulate: 3 approaches proposed by BIS to prevent a repeat of the 2022 collapse
The Bank for International Settlements (BIS), the global banking coordinator and “central bank of central banks”, has released a bulletin outlining its approach to cryptocurrency regulation in 2023.
BIS Says Cryptocurrencies Should Be Banned, Quarantined, or Regulated
Recent skepticism established theory Addressing Crypto Risks: Optional Layouts, The Bank for International Settlements (BIS) has said regulators can no longer ignore cryptocurrencies after the FTX/Alameda scandal.
The recent turmoil in the cryptocurrency market highlights the urgency of addressing risk. There are various policy measures, such as issuing a central bank digital currency to encourage healthy innovation. #BIS Bulletin #Crypt #CBDC # regulation https://t.co/DnI4GXi35X pic.twitter.com/qVDPSWBBwC
— Bank for International Settlements (@BIS_org) January 12, 2023
The authors opine that the collapse of FTX shows that crypto decentralization is often delusional. Governance is central to most of his DeFi. As such, the industry is not yet ready to fully self-manage.
This segment is exposed to many vulnerabilities from the TradFi space, but cryptographic details amplify the risks. Leaving cryptocurrencies without proper regulation is therefore becoming increasingly dangerous for retail investors.
Several business models in cryptocurrencies have turned out to be outright Ponzi schemes. These characteristics, combined with the huge information gaps faced by clients, greatly undermine investor protection and market integrity.
BIS officials have proposed three models (“approaches”) for how states should handle cryptography. First, you can completely ban cryptocurrencies and eliminate all associated risks. It protects investors from fraud and greatly enhances the stability of the financial system. However, a ban on cryptocurrencies could be circumvented, not to mention against the basic principles of society.
Regulators can then separate the crypto from TradFi (a “containment” strategy). BIS experts conceded that such isolation would not be possible in 2023, but would not better protect investors.
Is CBDC a true alternative to banning cryptocurrencies?
Finally, governments can regulate cryptocurrencies in a similar way to traditional financial institutions. A “responsible player” would benefit from proper regulation. On the other hand, due to the nature of the DeFi segment, finding a “reference point” (the responsible person or legal entity) is a difficult task.
Finally, BIS experts mentioned many non-Web3 “alternatives” that are as fast and cheap as DeFi protocols. First, they are a new generation of digital remittance frameworks such as his SEPA in Europe and his FedNow in the US.
Governments can also prevent people from exposure to cryptocurrency risks by launching viable and easy-to-use Central Bank Digital Currencies (CBDCs). TradFi can therefore adopt some of the most impressive elements of DeFi design, such as programmability, composability and tokenization.
As U.Today previously covered, the collapse of centralized cryptocurrency services Celsius, Voyager and Three Arrows Capital in Q3 2022 amid a painful Bitcoin (BTC) price drop, BIS has admitted that the worst “cryptocurrency warning” has come true.