Unless backed by the trust inherent in money issued by a central bank, Bitcoin and other cryptocurrencies are unlikely to help in a global economy facing an increasing risk of recession, the Bank for International Settlements said.
“Recent events have shown how structural flaws prevent crypto from achieving the levels of stability, efficiency or integrity required for a monetary system,” the Switzerland-based BIS said in its annual report released on Sunday.
“The recent implosions of the Terra stablecoin and its twin coin Luna are only the most spectacular collapses in the crypto sector,” the international organization aiming to support central banks’ pursuit of monetary and financial stability said. “Many lesser-known coins have seen their prices drop by more than 90% relative to their peaks last year,” it added.
The Terra-LUNA debacle along with Bitcoin’s price slump are reflective of the “structural problem” in the asset class, BIS General Manager Agustin Carstens told reporters in a press conference on Thursday. The comments and the report were embargoed until Sunday.
“Stablecoins have oftentimes proven to be everything else but stable,” with Bitcoin’s “very inherent problems” threatening the application of innovations in DeFi for the benefit and stability of the financial system, Carstens said. “I think all these weaknesses that were pointed out before have pretty much materialized,” he added.
Stablecoins are always in search of a nominal anchor, to “piggyback on the credibility provided by the unit of account issued by the central bank,” the BIS said in its report. “The fact that stablecoins must import the credibility of central bank money is highly revealing of crypto’s structural shortcomings,” it added. “Only the central bank can provide the nominal anchor that crypto craves.”
Authorities should ensure crypto and DeFi activities comply with requirements for comparable traditional activities, the BIS said. “Stablecoin issuers, for instance, resemble deposit-takers or money market funds.”
Consumer protection is also key and sound regulation should be in place to oversee adequate disclosure of digital asset advertising, which can often be misleading and downplay risks, according to the BIS.
The growing crypto investment from traditional financial institutions can also mean that shocks to the crypto system could have spillovers, the BIS said as caution.
However, the crypto meltdown is unlikely to cause a systemic crisis similar to how the implosion of bad loans triggered the Global Financial Crisis between mid 2007 and early 2009, Carstens said in comments reported by Reuters. Losses would be “sizable” with the “opaque nature” of the crypto industry feeding “uncertainty,” the news agency said paraphrasing his comments.
“Traditional financial stability concerns stemming from run risk are an urgent policy challenge,” the BIS said in its report. “However, focusing on prices diverts attention away from the deeper structural flaws in crypto that make it unsuitable as the basis of a monetary system that serves society,” it added. “We should also keep these longer-term structural issues on our radar.”
“Instead of serving society, crypto and DeFi (decentralized finance) are plagued by congestion, fragmentation and high rents, in addition to the immediate concerns about the risks of losses and financial instability,” the institution, which acts as a think tank for central banks globally, said.
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The comments come as the BIS said interest rates needed to be raised sharply worldwide, even at the cost of hurting growth, as the global economy faces the risk of inflation spiraling. “The key for central banks is to act quickly and decisively before inflation becomes entrenched,” Carstens told reporters.
A repeat of the stagflation witnessed in the 1970s is unlikely as “monetary policy and macroprudential frameworks” have improved and the world is less reliant on energy, the BIS said. However, it said given high debt and overvalued asset prices, which it characterized as financial vulnerabilities, any slowdown could get magnified.
Carstens disagreed that the incessant printing of money by central banks was the reason for runaway inflation, an assertion put forth by digital asset advocates highlighting the benefits of coins such as Bitcoin over fiat currencies that risk debasement.
“Certainly, there has been a flare-up of inflation, but this has not been the result of a printing fringe by the central banks,” Carsten told reporters. Central banks have managed to keep inflation “quite low” for the past 40 years, and acting quickly with recent interest rate increases should counter “this current bout of inflation,” he said.
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