Tackling the risks in crypto: Choosing among bans, containment and regulation

Abstract

The high-profile failures of a number of crypto firms have re-ignited the debate on the appropriate policy response to address the risks in crypto. The “shadow financial” functions enabled by crypto markets share many of the vulnerabilities of traditional finance and risks are often exacerbated by specific features of crypto. Authorities may consider different, and not mutually exclusive, lines of action to tackle the risks in crypto. These include (i) bans, which could tackle specific aspects of the crypto ecosystem, (ii) containment so that the real economy is insulated from crypto risks, and (iii) the regulation of the crypto sector. The paper highlights the pros and cons of the different approaches and proposes a framework to choose when bans, containment and regulation are most appropriate. It also describes the approach taken in Japan, which has been a pioneer in tacking such risks. With each approach, central banks and public authorities can also work to make traditional financial more attractive, thereby allowing responsible innovation to thrive.