BIS Papers No 156
Cryptocurrencies and decentralised finance (DeFi) aim to replicate many of the economic functions of traditional finance (TradFi), but their distinctive features introduce new financial stability risks. The document analyses these features, and examine key developments, such as smart contracts, decentralised exchanges (DEXs), stablecoins and new forms of central bank money. The findings suggest that while the underlying economic drivers are not different than in TradFi, DeFi poses significant challenges, including new forms of information asymmetries, market inefficiencies and the risk of cryptoisation in emerging markets.
The paper proposes tailored regulatory interventions, such as embedding rules within smart contracts and strengthening the oversight of stablecoins, to manage financial stability risks. Finally, we provide a framework for prudential regulation that can mitigate risks while fostering innovation in the rapidly evolving crypto ecosystem.
