In a report published on April 15, the Bank for International Settlements (BIS) pointed out that the increasing number of participants and capital injection into cryptocurrencies (crypto) and decentralized finance (DeFi) pose a clear threat to the legacy traditional financial system and exacerbate wealth inequity and the socioeconomic gap. The international financial institution warned that “the number of investors and the amount of capital in crypto and DeFi have reached a critical mass” – a point signaling growth and development where protective measures for investors say aroused global concern on protective measures for investors.”
Stablecoins Under Increased Scrutiny as Mechanisms of Key Value Transfer
The report by BIS particularly highlights the global scope of Bitcoin trade volume as a primary driver of regulatory concern. Along with the report’s findings, the overall crypto market size raises concern for authorities with regard to ‘the stability of crypto over and above the role it may have for TradFi and the real economy.’ Stablecoins have of focus in this particular report which the BIS noted are not providing value within the crypto ecosystem, they “have become the means through which participants transfer value within crypto.” The importance of stablecoins in smooth transactions within the digital assets system, this auxiliary function, is critical due to the unchecked systemic risks it poses and thus the need for strong regulatory guardrails.
US Legislative Efforts Aim Stability In Stablecoins Policy
Legislative action is being taken in the US in response to the remarkable rise in importance of stablecoins. The STABLE Act, not described in detail in the provided material, attempts to form a full regulatory schematic for issuance of payment stablecoins pegged to the US dollar. The proposed legislation intends to brings complete safeguards in the market for stablecoins focusing on transparency and consumer protection as its primary goals.
New steps towards the regulatory framework of stablecoins can be witnessed with the approval of the GENIUS Act, “Guiding and Establishing National Innovation for US Stablecoins.” This act moved past the Senate Banking Committee on March 13, receiving a bipartisan approval of 18-6. Its primary focus is the governance of collateralization requirements which the stablecoin issuers must follow along with full adherence to the Anti-Money Laundering (AML) policies. These attempts at legislation in the US stem from growing concerns of lawmakers regarding the unregulated environment stablecoins operate in alongside the risks they may pose.
Issues on Crypto’s Ability To Widen the Wealth Inequality Gap
Apart from citing the systemic dangers posed to classical finance, the BIS report also tackled in detail issues on the widening income disparity of concern with respect to cryptocurrency markets. The report argues that the ‘speculative frenzy’ crypto trades attract and the volatility built into them, allows larger, relatively well informed, or well-resourced players to use the emotional trading of retail investors to profit massively. The BIS recalls in particular the 2022 FTX debacle as an illustrative example of how such dynamics can result in significant financial loss to some and potential gain to others. This observation highlights the gap in regulations designed not just to sustain the financial system but also safeguarding weak investors and promoting market integrity in cryptocurrency trading.
