BIS: Crypto, DeFi increase wealth inequality, destabilize finance

According to the Bank for International Settlements (BIS), the increasing acceptance of cryptocurrencies could pose risks to the traditional financial system and exacerbate wealth inequality. In a report dated April 15, BIS warned that the number of investors and capital in the crypto market, DeFi has "reached significant volume" and protecting investors has become "a top concern for regulators."

The scale of the crypto market indicates that authorities should be more concerned about "the stability of cryptocurrencies rather than the role they could play in TradFi and the real economy," the report said, while highlighting the role of stablecoins, which BIS believes have "become the means through which participants transfer value in the crypto ecosystem."

The report calls for regulations on stablecoins to have stability requirements and reserve assets, in order to ensure the conversion of stablecoins to US dollars under "stress market conditions."

This report was released two weeks after the U.S. House Financial Services Committee passed the STABLE Act on transparency and accountability for better ledger economy (STABLE Act), with a vote count of 32–17 on April 2.

The STABLE Act aims to create a clear regulatory framework for dollar-pegged payment stablecoins, emphasizing transparency and user protection.

On March 13, the GENIUS Act (Guidelines and Establishment of National Innovation for US Stablecoin) was passed by the Senate Banking Committee with a vote of 18–6. This bill aims to establish guidelines for collateralized assets and requires stablecoin issuers to fully comply with anti-money laundering laws.

Cryptocurrency can exacerbate the wealth gap

BIS also expressed concern that crypto markets could exacerbate income inequality by allowing large investors to exploit the emotions of less knowledgeable retail participants, as seen in the collapse of FTX in 2022.

Whale activity compared to retail after the FTX collapse | Source: BISBIS report notes:

"When prices fell sharply in 2022, actual users traded more. The most concerning thing is that large Bitcoin holders (whales) are selling while regular retail investors are buying in. This shows that the crypto market, often presented as an opportunity to promote inclusive growth and financial stability, can become a tool for redistributing wealth from the poorer to the richer."

The conclusion report states that DeFi and TradFi have similar underlying economic factors, but the "unique characteristics" of DeFi, such as "smart contracts and composability," present new challenges that require proactive regulatory intervention to "protect financial stability while promoting innovation."

Disclaimer: This article is for informational purposes only and is not investment advice. Investors should do their own research before making any decisions. We are not responsible for your investment decisions.

Minh Anh