A new report from the Bank for International Settlements (BIS) is advocating a vigorous “containment” approach to digital assets. It further underscores the Biden administration’s call for more control over decentralized finance (DeFi). This approach goes beyond simply separating these emerging technologies from traditional banking systems and the broader economy. While the BIS’s position has been deeply controversial, we shouldn’t be surprised by the controversy. Lingering worries over the development anonymity common in DeFi, the volatility of digital assets, and the emergence of USD-backed stablecoins are creating intense backlash from industry heavyweights.

The report flags an increasing ideological divide between policymakers. On one side are those who think that we can exert control by withdrawing into a bubble. Others advocate for integration through modernization, recognizing the potential benefits of incorporating digital assets into the existing financial framework.

Industry Leaders Criticize BIS Approach

Christopher Perkins, the president of blockchain investment firm CoinFund, called the BIS’s recommendations “dangerous and reckless.” He characterized them as “dangerous” and “uninformed.” His main point is this latest proposed containment strategy shows a deep-seated inability to understand the truly transformative potential of these new, digital assets.

"Many of their conclusions, perhaps fueled by fear, arrogance, or ignorance, completely miss the mark." - Christopher Perkins

Perkins goes on to argue that limiting access to USD-backed stablecoins would be counterproductive, particularly for emerging market economies.

"If there is demand for USD stablecoins and they help improve conditions for those in developing economies, maybe just maybe that’s a good thing," - Christopher Perkins

Concerns Over Innovation and Financial Stability

Christian Catalini, co-founder of Lightspark and a MIT-trained economist, expressed those fears in stark terms. He called the BIS’s report indicative of a “mistrust of innovation.” Yet, by his own admission, he suggests that the BIS has fallen behind the technological advances occurring in the crypto ecosystem.

"writing parking regulations for a fleet of self-driving drones earnest work, two technological leaps behind" - Christian Catalini

They caution that the BIS’s intentions to protect digital asset markets from traditional finance may inadvertently destabilize the broader global financial system. The latest BIS report expresses deep concern that macroeconomic instability is distributed across stablecoins and cryptocurrency in general. This concern is similarly acute in hyperinflationary environments such as Venezuela or Zimbabwe.

"When one market runs 24/7 in real-time and the other sleeps at night and on weekends, any artificial separation creates massive liquidity risk of unimaginable scale" - Christian Catalini

Potential Consequences of Isolation

The report’s recommendations to isolate digital assets stem from a place of risk-based concern. Critics claim these types of measures would kill innovation and prevent people from using potentially useful financial services. Their argument is that trying to isolate crypto is as impossible as trying to control the internet.

"It’s the new internet that gives anyone with a connection access to financial services. You cannot control it any more than you can control the internet." - Christopher Perkins