The Crypto Ecosystem: Key Elements and Risks

A report submitted by the Bank of International Settlements to the G20 Finance Ministers and Central Bank Governors.

This report reviews the key elements of the crypto ecosystem and assesses its structural flaws. It then goes over the risks that it poses and discusses options for addressing them. It also identifies data gaps and discusses ways to alleviate them.

The report has three key takeaways. First, the crypto ecosystem is subject to a high degree of fragmentation and is characterised by congestion and high fees. This would have been the case even if it had stayed true to its original decentralised ethos. These structural flaws derive from the underlying economics of incentives of validators rather than from technology. And while crypto has offered some elements of genuine innovation, these can be replicated or embedded in the safer and more trusted traditional finance system (BIS (2023)). Second, despite an original ethos of decentralisation, crypto and DeFi often feature substantial de facto centralisation, which introduces various pain points. A prime example concerns stablecoins, which piggyback on the credibility of the central bank’s unit of account and may pose risks to monetary sovereignty. Third, while DeFi mostly replicates services offered by the traditional financial system, it does not finance any activity in the real economy but amplifies known risks.

Read More at Bank of International Settlements (PDF)

Read the rest at Bank of International Settlements (PDF)