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Compliance Insight Weekly Update

Bank of International Settlements (BIS) Report

The BIS issued on January 12 bulletin summarizing factors that enhance cryptocurrency risks and outlining three lines of action to address these risks. 

The report focused its statements based on its observation of the market throughout the years and ending with the 2022 crypto crisis: the collapse of Terra Luna and FTX crypto trading platform’s bankruptcy. 

The outlined risk-enhancing factors are high leverage, liquidity and maturity mismatches and substantial information asymmetries. “CeFi and DeFi protocols are subject to many of the vulnerabilities familiar in TradFi, but often to a larger extent. They rely extensively on leverage and take on liquidity and maturity mismatches. In addition, crypto intermediaries face severe deficiencies in risk management, ring-fencing of business lines and handling of customer funds. Several business models in crypto turned out to be outright Ponzi schemes. These characteristics, coupled with the huge information deficit customers face, strongly undermine investor protection and market integrity”

At first glance, given the connection between crypto and traditional finance, the global economy may seem at risk, when in reality, the crypto sector is not mature enough and sufficiently interconnected with traditional finance to threaten financial stability.

The goal of addressing risks posed by crypto should: 

  • (i) appropriately protect consumers and investors; 
  • (ii) preserve market integrity against fraud, manipulation, money laundering and the financing of terrorism; and 
  • (iii) safeguard financial stability. 

The proposed lines of action are to:

  1. BAN: ban certain crypto activities 
  2. CONTAIN: sever the link between traditional finance and crypto 
  3. REGULATE: regulate the sector further 
bis-risk-addressing graph
source: https://www.bis.org/publ/bisbull66.pdf

Recent initiatives, both internationally and in individual jurisdictions, which follow the three lines of action have been detailed in the report’s Annex.