Crypto and DeFi Reach "Critical Mass," TradFi Stability in Peril
The BIS sees a risk to TradFi from spillovers coming from DeFi and stablecoins.
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No sooner does the BIS launch its assessment of crypto and DeFi’s impact on financial stability than the “OM” Token collapses, sending a $5.4 billion jolt to the crypto world and crashing its related blockchain for securitizing real-world assets.
The timing of the OM token crash seems to underscore the BIS’s assessment that the greater integration of crypto into traditional finance (TradFi) raises real concerns regarding its impact on financial stability.
This message will likely never reach the “cryptobros,” whose mantra is that crypto is the rightful successor to TradFi, regardless of the billions lost.
Still, for the rest of us jolted by trade wars and the accompanying stock losses, we’d like to be sure that our savings aren’t at risk when the next major crypto crash hits.
The BIS’s concerns center on DeFi and Stablecoins, which are increasingly integrating into TradFi, bringing with them potential risks, and they call for increased regulation and containment.
This would seem sensible to all but the most zealous.
The stakes are high as the US will regulate stablecoins this summer, and they’ll be showing up at a bank near you as the US’s new digital currency in lieu of a CBDC.
The BIS isn’t the bad guy for pointing this out, even if they are acknowledged to be no great fan of crypto.
Now, as if that isn’t enough, there is a real risk to Emerging Markets and Developing Economies (EMDEs) from “cryptoisation.” The widespread adoption of crypto can exacerbate local currency instability and circumvent tax and currency laws.
Still, who can blame someone in extreme cases like Venezuela, Zimbabwe, or Turkey, for using crypto? The problem is that the gains accrue only to a few.
Meanwhile, once again, the BIS shows how whales sold into turbulent markets following the Terra (Luna) and FTX crash.
Demonstrating how cryptocurrency effectively redistributes wealth from the poor to the wealthy.
👉The BIS’s Four Top Priorities for DeFi & Crypto
1️⃣ The interaction between DeFi and TradFi needs more attention, especially as tokenisation of real-world assets, the use of smart contracts in TradFi and new forms of digital intermediation emerge.
2️⃣ The role of stablecoins in supporting DeFi’s growth and the risks posed by their instability require further analysis, spanning both the stability of the DeFi ecosystem itself and its potential spillovers with TradFi.
3️⃣ There is a need to explore how governance structures of DAOs may influence financial stability and how regulators might engage with truly decentralised systems.
4️⃣ Finally, the potential macroeconomic implications of cryptoisation in EMDEs must be fully understood.
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