BIS warns that crypto growth may shift wealth and risk global finance

The Bank for International Settlements (BIS) has warned that the rapid expansion of cryptocurrencies and decentralised finance (DeFi) could heighten financial instability and widen the wealth gap, urging regulators to take stronger action in response.

In its April report, the BIS stated that crypto and DeFi markets have reached a “critical mass,” with enough investors and capital to pose risks beyond the crypto sector itself.

The report highlighted that stablecoins, now central to value transfers within crypto, could transmit shocks to the broader financial system if not properly regulated.

The BIS called for targeted regulation of stablecoins, recommending clear reserve requirements and mechanisms to ensure redemption during market stress.

These recommendations align with recent U.S. legislative efforts, such as the STABLE Act and the GENIUS Act, which seek to establish transparency and consumer protections for stablecoins.

A central concern in the BIS report is the potential for crypto markets to worsen income inequality.

The report cited evidence from the 2022 FTX (CRYPTO:FTT) collapse, noting that large holders (“whales”) were selling assets while smaller retail investors (“krill”) were buying, resulting in wealth being transferred from less sophisticated to wealthier participants.

“The crypto market, which is often presented as an opportunity for inclusive growth and financial stability, can be a means for redistributing wealth from the poorer to the wealthier,” wrote the BIS.

The BIS also identified several financial stability risks linked to crypto, including high price volatility, lack of transparency, operational vulnerabilities, and the risk of bank disintermediation if consumers shift away from deposits to cryptoassets.

These risks are amplified in emerging markets, where financial literacy is lower and access to traditional investment options is limited.