The rise of cryptocurrencies and decentralized finance (DeFi) has reshaped the financial landscape, offering alternatives to traditional finance (TradFi) while introducing unique risks.
A report from the Bank for International Settlements (BIS), titled Cryptocurrencies and Decentralized Finance: Functions and Financial Stability Implications, examines these developments, highlighting the transformative potential and the challenges of this evolving ecosystem.
A joint survey from by EY-Parthenon and Coinbase also reveals growing institutional enthusiasm for digital assets, underscoring their integration into mainstream finance.
The BIS report emphasizes that cryptocurrencies and DeFi aim to replicate many economic functions of TradFi, such as lending, trading, and payments, but their decentralized nature introduces distinct features.
Technologies like smart contracts, decentralized exchanges (DEXs), and stablecoins enable peer-to-peer transactions without intermediaries, reducing costs and enhancing accessibility.
However, these innovations come with significant financial stability risks (according to the report).
The report identifies new forms of information asymmetries, where incomplete or opaque data in DeFi protocols can obscure risks for investors.
Market inefficiencies, such as liquidity mismatches in DEXs, and the volatility of unbacked cryptocurrencies like Bitcoin, further exacerbate vulnerabilities.
Additionally, the BIS report highlights the risk of “cryptoisation” in emerging markets, where widespread adoption of cryptocurrencies could undermine local currencies and monetary policy, potentially destabilizing economies.
To address these challenges, the BIS report proposes tailored regulatory interventions.
Embedding rules within smart contracts could enhance transparency and enforce compliance automatically, reducing the risk of fraud or manipulation.
Strengthening oversight of stablecoins—digital assets pegged to fiat currencies—is critical, given their role in facilitating DeFi transactions and their potential to trigger runs if reserves are mismanaged.
The report advocates for a prudential regulatory framework that balances risk mitigation with fostering innovation, ensuring that the crypto ecosystem evolves responsibly.
Meanwhile, the EY-Parthenon and Coinbase survey, conducted in January 2025 with 352 institutional investors globally, reveals strong optimism about digital assets.
Around 83% of respondents plan to increase allocations to cryptocurrencies in 2025, with 59% aiming to allocate over 5% of their assets under management.
This shift reflects growing confidence in digital assets as a core component of a portfolio, driven by expectations of regulatory clarity and technological advancements.
The survey highlights diverse use cases, with 84% of investors using or interested in stablecoins for yield generation, foreign exchange, and payments.
Interest in DeFi is also surging, with engagement expected to triple to 75% within two years, fueled by applications like derivatives, staking, and lending.
Tokenized assets, particularly alternative investments like real estate and private funds, are gaining traction for their liquidity and diversification benefits.
Despite this enthusiasm, regulatory uncertainty remains a top concern, cited by 52% of investors, followed by volatility (47%) and custody security (33%).
The survey notes that the 2024 U.S. election and subsequent policy shifts, such as the repeal of restrictive custody rules, have bolstered investor confidence.
However, ongoing developments, including recommendations from the President’s Working Group on Digital Asset Markets, will shape the regulatory landscape further.
Source: crowdfundinsider
