Central banks seeking to rein in crypto risks could pursue strategies ranging from regulation to outright bans of the technology, all of which have pros and cons, according to a new bulletin by the Bank for International Settlements. The bulletin noted that the recent failure of FTX and other crypto firms have “reignited the debate on the appropriate policy response to address the risks in crypto.” The document explores three strategies: banning the technology, containment and regulation. The authors also said central banks are uniquely positioned to offer an alternative to crypto. “By encouraging sound innovation in (traditional finance), they could contribute to a more efficient monetary system,” according to the bulletin.
Banning the technology would reduce potential harm to the financial system and prevent losses due to crypto provider misconduct, but it would “conflict with the founding principles of society,” discourage useful innovation and may be circumvented in practice, the authors said. Containment—such as by limiting the flow of funds between crypto and traditional finance—could prevent damage to the economy and avoid giving the technology a regulatory “seal of approval,” but a fully functional firewall may not be feasible and market integrity risks remain. Regulation would allow for responsible players to innovate, but it is challenging to map crypto and traditional finance activities, and law enforcement would be challenged to identify the entities suited as entry points for regulation.
In a letter last year to U.S. regulators, ABA argued that the illicit finance risks posed by digital assets can be most effectively managed by regulating nonbank cryptocurrency companies while allowing banks to engage more fully in digital asset activities, where they will be subject to comprehensive regulation and Bank Secrecy Act requirements. “It is critical that such technology is developed responsibly and within a regulatory framework that ensures illicit finance and national security risks are limited,” the association said.