Assessment of Cross-Border Cryptocurrency Flows
Recent research conducted by the Bank for International Settlements (BIS) has examined the trends and factors influencing cross-border movements of cryptocurrencies and stablecoins. Cryptocurrencies, which derive their value from market demand rather than being linked to any physical asset, have gained popularity among investors. Stablecoins, on the other hand, are designed to maintain a steady value by pegging their worth to a fiat currency, making them an attractive option for various financial applications. As interest in these digital currencies grows, they raise both opportunities and concerns for regulators worldwide regarding their implications for financial stability and other critical issues.
Investigating Major Cryptocurrencies and Stablecoins
The analysis scrutinizes the cross-border transactions of the leading cryptocurrencies—Bitcoin and Ether—as well as the top stablecoins, Tether and USD Coin, across 184 nations from 2017 to 2024. The 39-page report, titled “DeFiying gravity? An empirical analysis of cross-border Bitcoin, Ether and stablecoin flows,” was recently released as a BIS working paper. Co-authored by prominent BIS economists, the study reveals that speculative interests and global funding conditions primarily drive the movement of native crypto assets. Moreover, transactional purposes are particularly evident in stablecoin exchanges and low-value Bitcoin transactions, which are often associated with high costs of traditional remittances.
Changing Dynamics of Crypto Flows
The report indicates that transactions involving Bitcoin, Ether, Tether, and USD Coin have experienced remarkable growth, peaking at approximately $2.6 trillion in 2021, with stablecoins representing nearly half of that total. Although transaction volumes dipped to $1.8 trillion in 2023, they have shown signs of recovery. The authors note that geographical distance imposes far less restriction on crypto flows compared to traditional financial transactions, suggesting that decentralized networks allow crypto assets to bypass conventional barriers. They also observe that tightening global funding conditions correlate with reduced cross-border crypto flows, signaling the use of these assets as high-risk investments. Additionally, the study identifies that stablecoins and low-value Bitcoin payments are being utilized for remittances, highlighting the varying functionalities of different digital assets.
Limited Impact of Policy Measures
The authors conclude that regulatory measures aimed at controlling traditional financial flows may have a minimal effect on cross-border crypto transactions. As cryptocurrencies increasingly integrate with conventional finance, it becomes vital for both policymakers and market participants to comprehend the systemic risks and potential contagion effects between these sectors. They emphasize the need to explore the socio-economic ramifications of rising crypto adoption, especially in emerging and developing economies, considering aspects such as financial inclusion and economic stability, as well as the role of crypto assets in mitigating local currency fluctuations.
Understanding Macro Implications of Cryptoassets
The introduction of the study points out that cryptoassets are progressively being incorporated into traditional financial instruments such as exchange-traded funds and futures. Despite their total market capitalization surpassing that of several large national stock markets, the broader economic implications of these digital assets remain poorly understood. A significant challenge arises from the decentralized nature of cryptocurrencies, which operate across borders without the constraints of intermediary institutions and existing regulations. The paper notes that the US, UK, and major emerging markets are pivotal nodes within various crypto networks, with notable geographical shifts in activity occurring, particularly due to stricter regulations in China steering transactions toward other emerging markets like India, Indonesia, and Turkey.
Crypto as a Solution for High Remittance Costs
Stablecoins are often highlighted as effective means for remittances and international payments, particularly for migrant workers sending funds back home. The analysis supports this idea, indicating that the high fees associated with traditional remittance services lead to increased usage of stablecoins and low-value Bitcoin transactions from developed to emerging markets. The study points out that capital flow management measures, which are regulatory actions by governments or central banks to control capital movements, appear to have little influence on cryptocurrency flows. In fact, such measures might even coincide with increased cross-border transactions of certain crypto assets, suggesting a tendency for circumvention.
Concerns About Financial Stability
A significant portion of the paper addresses the effects of regulatory interventions on cryptocurrency flows. The authors express growing apprehension regarding financial stability risks as crypto assets become more entwined with the traditional financial landscape. Previous analyses by the Financial Stability Board (FSB) highlighted potential threats posed by unbacked crypto assets, stablecoins, and decentralized finance to global financial stability, warning of the rapid evolution of crypto markets. The BIS report reiterates the necessity for a thorough understanding of systemic risks and contagion effects as cryptocurrencies continue to merge with mainstream finance. Additionally, it stresses the socio-economic consequences of heightened crypto adoption, especially in developing nations, where examining the effects on financial inclusion and economic resilience becomes crucial.
