Today the Bank for International Settlements (BIS) published a paper on the institutional adoption of cryptocurrencies. Based on somewhat stale data at the end of 2020, it found adoption by banks to be negligible, with an exposure of just $180 million. However, it recognizes the situation is changing fast. At the same time, relatively unregulated crypto exchanges have grown rapidly and represent potential counterparty risks. Hence, cryptocurrency exchanges need regulation which will lead to consolidation.
At a big picture level, although the original purpose of cryptocurrencies was to create a trustless system, in reality, there are just a different set of intermediaries. Instead of banks, cryptocurrency exchanges are acting as trusted intermediaries. Except they are currently lightly or unregulated.
Hence these new institutions need to have greater regulation and oversight regarding financial stability, consumer protection, and compliance with AML and KYC. It’s suggested that rather than requiring reporting, there will be embedded supervision which is usually based on blockchain network monitoring. However, it’s unclear how this will impact the internal transactions performed on centralized crypto exchanges.
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