BIS Warns of Financial Stability Risks from Cryptocurrencies

Bitcoin, introduced in 2009, was designed to be a decentralized digital currency for direct peer-to-peer payments, eliminating the need for intermediaries. However, its journey has seen it primarily embraced as a speculative asset rather than a widely used payment method for everyday transactions. While it is possible to pay for certain online services with Bitcoin, such as web hosting or VPNs, mainstream purchases for everyday items remain largely out of reach for the average person. On average, Bitcoin transactions take about 10 minutes to confirm, which is not user-friendly. Additionally, transaction fees can become prohibitively high during peak periods, making small or everyday transactions less feasible.

The Bank for International Settlements (BIS) released a report titled “Cryptocurrencies and Decentralised Finance: Functions and Financial Stability Implications” this month, which delves into the economic functions of cryptocurrencies and DeFi. The report highlights the potential risks to financial stability posed by cryptocurrencies and DeFi, which aim to mirror many services offered by traditional finance, such as lending, borrowing, and trading. However, these services introduce new financial stability risks due to their unique characteristics. For instance, while smart contracts and decentralized exchanges offer efficiency gains, they also create challenges like information asymmetries and market inefficiencies. Stablecoins, which play a notable role in DeFi, can be a source of instability if not properly regulated. The report also establishes that the adoption of cryptocurrencies in emerging markets can lead to ‘cryptoisation’, where traditional financial systems are bypassed, potentially undermining monetary sovereignty and financial stability.

One of the main issues with Bitcoin and cryptocurrencies in general is their regulation. The lack of clear and consistent regulations has created uncertainty for both users and businesses, making it difficult for Bitcoin to gain widespread acceptance as a means of payment. For example, the prior SEC leadership oversaw $7.42 billion in crypto-related fines from 2013 to 2024, while the current administration seems much more lax, dropping 12 crypto cases from the start of this year. This regulatory maze hinders mainstream adoption, as countries around the world have different types of regulations when it comes to crypto. Nonetheless, Bitcoin is in a much better position than it was several years ago, as it’s getting more and more attention. As the technology advances, we might eventually see it being used in everyday transactions in the future.