The World's Banking Center Cryptocurrency is Reaching "Critical Mass" Said: "It Could Pose a Threat" - Coin Bulletin

The Bank for International Settlements (BIS) stated that cryptocurrencies and decentralized finance (DeFi) systems carry potential risks for financial stability and that these systems have reached a "critical mass."

BIS stated in the report it released last week that cryptocurrencies and DeFi could pose a significant threat to the financial system. The report emphasized that DeFi and cryptocurrency markets are increasingly integrating with the traditional financial system, and this integration could increase risks. The size of the cryptocurrency market continues to grow, driven by developments such as the launch of Bitcoin ETFs and the tokenization of real-world assets (RWA).

The crypto market affects the income distribution between the rich and the poor

The BIS report suggests that the crypto market has the potential to alter the distribution of income between small investors and wealthier investors. During times of crisis, it is observed that small investors invest in crypto while wealthy individuals exit the market during these periods. This situation is expressed as "the crypto market could facilitate a transfer of wealth from the poor to the rich."

When evaluating the impacts of BIS, crypto, and DeFi on the traditional financial system, four main risk channels were identified:

1. Exposure of traditional finance to crypto
2. The security effects of cryptocurrency price movements
3. Income and wealth effects
4. Widespread use of crypto in payment and settlement systems.

Regulation of DeFi and KYC practices

BIS proposes the introduction of regulations similar to traditional financial systems with the increasing prevalence of DeFi. These regulations include Identity Verification (KYC), disclosure obligations, and sufficient training and qualification requirements for market professionals. Additionally, the central role of stablecoins in DeFi and the potential instabilities of these assets are highlighted as areas that require further analysis.

BIS suggests that further research into DeFi systems should examine the relationship between decentralized autonomous organizations (DAO) and financial stability. The report states that there is a need for more research to understand the future impacts of DeFi and how regulatory authorities should approach this area.