Financial stability risks from cryptoassets in emerging market economies

Report by the Consultative Group of Directors of Financial Stability (CGDFS) established at the BIS Representative Office for the Americas

In emerging market economies (EMEs), cryptoasset adoption has been on a steady rise. For some users, cryptoassets provide an alternative to limited investment and savings instruments. For others they offer a seemingly safe haven against volatile domestic currencies. For EME financial authorities, there are serious concerns about their ability to monitor cryptoasset markets and to assess the financial stability risks from cryptoassets. This report studies how vulnerabilities in the nature, structure, composition and function of cryptoasset markets translate into financial stability risks in traditional financial markets. This includes market, liquidity, credit and operational risks, bank disintermediation and capital flow risks. It then outlines the transmission channels through which these risks can affect financial stability. Risk catalysts in EMEs can strengthen these transmission channels, increasing a country's vulnerability to financial stability risks. In general, the report finds three catalysts: the economic and financial landscape, technological penetration and regulatory stance. The last part of the report details some principles for regulating and supervising cryptoasset markets in EMEs. Authorities can consider (selective) bans, containment and regulation. The report focuses on three main principles: establishing clear mandates for authorities, complementing activity-based regulation with entity-based regulation and addressing data gaps. This report was prepared by a task force under the auspices of the Consultative Council for the Americas (CCA) Consultative Council of Directors of Financial Stability.

JEL classification: E42, E58, G23, O31.

Keywords: cryptoassets, stablecoins, financial stability, emerging markets.