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07/13/2023The Bank of International Settlements (BIS) recently showed skepticism about the potential role of crypto in the global monetary framework, citing flaws that originate from the incentives of validators rather than the technology itself.
In a comprehensive report, the BIS argued that the reality of the crypto ecosystem deviates significantly from the vision of decentralization commonly championed by enthusiasts.
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The bank pointed to the 2022 collapse of the FTX crypto exchange as a stark reminder of this dichotomy, stating:
“Cryptocurrencies often boast of decentralization, yet we see the rise of new centralized intermediaries that have become instrumental in directing capital flow into the crypto world.”
A report for the #G20 reviews the key elements of the crypto ecosystem and assesses structural flaws, risks and data gaps #G20India https://t.co/AXSbvoWAzs pic.twitter.com/iSnoizkIbA— Bank for International Settlements (@BIS_org) July 11, 2023
Interestingly, the bank acknowledged the innovative capabilities developed within the industry, such as programmability, composability, and financial transaction automation. These elements could be successfully integrated into the more reliable and trusted traditional finance system, offering a safer approach to such technologies.
The BIS report also scrutinized the decentralized finance (DeFi) industry, labeling it as largely “self-referential.” It accused DeFi of mirroring services the traditional finance system provided while amplifying risks and contributing little to the economy.
“Given the high risks involved, particularly for retail investors, the structural limitations of crypto and DeFi make them unsuitable to play a positive role in the financial framework,” the report contended.
Despite the criticism, the BIS also saw potential in tokenizing real-world assets to bridge the gap between TradFi and DeFi. This could spur crypto growth, as new capital could be funneled into these tokenized assets.
However, the BIS also warned of growing interconnectivity between crypto and traditional finance, with the potential to upset monetary sovereignty. “While the systemic relevance of the crypto ecosystem may increase due to the expansion of real-world asset tokenization, it’s crucial to remember that such a blend could also jeopardize monetary autonomy,” the BIS cautioned.
While the BIS acknowledged the potential of the crypto industry‘s technological advances, it remained wary of the sector’s inherent flaws and risks to the global monetary system.
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