3 Approaches to Manage Crypto Risks: BIS Economists

• Bank of International Settlements (BIS) economists have outlined three potential approaches for regulators and central banks to address the risks posed by cryptocurrencies.
• These approaches include banning specific crypto activities, isolating crypto from traditional finance and the real economy, and regulating the sector in a manner akin to traditional finance.
• The authors noted that crypto markets have experienced booms and busts, but that these failures have not yet spilled over to the traditional financial system or the real economy.

The Bank of International Settlements (BIS) recently published a bulletin titled “Addressing the risks in crypto: laying out the options.” Authored by BIS economists Matteo Aquilina, Jon Frost, and Andreas Schrimpf, the report outlines various options for regulators and central banks to address the risks posed by cryptocurrencies.

The authors discussed the various risks associated with cryptocurrencies, noting that crypto markets have experienced a series of booms and busts, often resulting in large losses for investors. In order to mitigate these risks, they outlined three potential lines of action.

The first option is to ban specific crypto activities. The authors noted that this approach could be useful in certain cases, such as when certain activities pose particularly high risks, or in order to protect investors and consumers.

The second approach is to isolate crypto from traditional finance and the real economy. This could be done by requiring exchanges to maintain segregated accounts or by mandating that crypto transactions be conducted through special purpose vehicles.

The third option is to regulate the sector in a manner akin to traditional finance. This could involve creating new regulations for crypto companies, requiring them to register with authorities and adhere to know-your-customer and anti-money laundering regulations.

The authors concluded that authorities can now consider a variety of policy approaches and at the same time work to improve the existing monetary system in the public interest. They noted that, while crypto markets have experienced a remarkable series of booms and busts, these failures have so far not spilled over to the traditional financial system or the real economy. However, they cautioned that there is no assurance that they will not do so in the future, as decentralized finance and traditional finance become more intertwined.

In light of these risks, the authors recommended that regulators and central banks adopt a combination of the three potential approaches in order to mitigate the risks posed by cryptocurrencies. By taking appropriate measures, these authorities can ensure that the crypto sector is monitored and regulated effectively, while protecting investors and consumers.

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