The week the BIS, the central bank of central banks, released a paper exploring the financial stability risks of cryptocurrencies and decentralized finance (DeFi). While this is a topic that has been covered many times, including by some of the same authors a couple of years ago, the paper is articulate and fresh. Most central bankers have argued that cryptocurrency is too small and self-contained therefore does not yet present a financial stability risk. This report states that the crypto market has “reached critical mass”, although it still considers it as having minimal linkages to traditional finance (TradFi). However, the issuance of Bitcoin ETFs and the expansion of stablecoins and real world asset (RWA) tokenization are changing that.
It also included a noteworthy graphic showing that in crises, small investors increase their crypto exposures, while wealthier ones get out. Hence, they conclude that the crypto market can be “a means for redistributing wealth from the poorer to the wealthier.”
We’d note that another central banker, the ECB’s Ulrich Bindseil, has made the same observation but for a different reason. He sees bitcoin as redistributing wealth from late investors to earlier ones, who tend to be wealthy.
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