Cryptocurrency’s ‘illusory appeal’ should be met through regulation, not bans, says BIS study

• Developing countries are the main users of cryptocurrencies due to volatile exchange rates and lack of access to banks.

• Latin American central bankers repeated concerns that cryptocurrencies would fall short of expectations, but said the technology should be controlled, not banned.

Cryptocurrencies cannot reduce financial risks in emerging markets, but the answer should be regulation, not outright bans, a group of central bankers from Mexico and Colombia said on Tuesday.

Emerging economies are popular places for people to try cryptocurrencies, as fiat currency’s volatility and lack of access to banks make it attractive to seek alternatives to traditional finance. According to Chainalysis data, only two of the top 20 cryptocurrency jurisdictions in the world are from the developed world, with the others being Vietnam, Brazil, and India.

But promises to protect people from the effects of inflation or offer a cheap payment alternative are only part of the “illusory appeal of cryptocurrencies,” the study found. While cryptocurrencies are a popular way to send funds abroad, they can also result in “large and sudden changes in capital flows,” the report warns — an impact on financial stability that central bankers are typically wary of.

“Crypto-assets have so far not reduced but actually increased financial risk in less developed economies,” said a study published by the Basel Bank for International Settlements (BIS), adding that regulating the sector would be a better option than a total ban, given the difficulties of enforcing the rules and the risk of limiting innovation.

“The technology can continue to be used in a variety of constructive ways,” the study said, adding that regulations will need to “steer innovation in socially useful directions.”

The report said the emergence of cryptocurrency ETFs could increase risk by allowing a wider group of people without financial expertise to enter the market. In June, the world’s largest asset manager, BlackRock, filed to establish an ETF based on the spot price of bitcoin (BTC) in the U.S.

The skepticism of global organizations towards cryptocurrencies is nothing new. In July, the BIS said cryptocurrencies cannot be used as money due to “inherent flaws,” while the UN development arm said emerging economies should implement widespread restrictions to limit risks to tax collections and monetary policy.

The report echoes comments made by key U.S. and International Monetary Fund officials who argued for a similar approach of regulation rather than prohibition at a recent G20 roundtable.

Read more: G20 set to crystallise global cryptocurrency rules as India ends presidency