Exploring the Crypto Landscape: Insights from the Bank for International Settlements

MV Global
13 min readJul 14, 2023


In the midst of an ever-evolving financial landscape, a new frontier has emerged that is transforming the way we perceive and interact with money: the world of cryptocurrencies. This digital frontier, fueled by technological innovation and an ethos of decentralization, offers a new perspective on financial systems and services.

The Bank for International Settlements (BIS), often referred to as the ‘central bank for central banks’, has taken a deep dive into this emerging landscape. In a comprehensive study presented to the G20 Finance Ministers and Central Bank Governors, the BIS dissects the crypto ecosystem, unearthing the potential, the promise, and the perils that it holds.

The BIS report, titled “The Crypto Ecosystem: Key Elements and Risks,” provides an insightful exploration of this transformative ecosystem. From the birth of Bitcoin in 2009 to the rise of DeFi and the advent of stablecoins, the crypto world is teeming with innovations that are reshaping the financial landscape.

However, the report also delves into a phenomenon that seems paradoxical in the decentralised world of crypto — the significant role of centralised entities. Particularly, it highlights the role of centralised exchanges in the crypto ecosystem, leading to a phenomenon known as Centralised Finance (CeFi). These centralised entities have reasserted their key role in the ecosystem, influencing crypto prices and contributing to market volatility.

The BIS report also scrutinizes the inherent vulnerabilities within the crypto ecosystem. From the operational risks associated with DeFi to the fragility of stablecoins, it presents a sobering view of the challenges that accompany the opportunities in the crypto world.

In this article, we’ll delve deeper into the report’s findings, unpacking the intricacies of the crypto ecosystem, and shedding light on its key elements and the risks they carry. Join us as we navigate this digital frontier, exploring the vibrant, complex, and captivating world of crypto.

Crypto’s Growth and Development

Source: https://www.bis.org/publ/othp72.pdf
Source: https://www.bis.org/publ/othp72.pdf

The BIS report provides a captivating account of the evolution and development of the crypto ecosystem. It traces the journey from the genesis block of Bitcoin to the present-day intricate web of crypto assets and DeFi protocols, highlighting the key milestones and transformations along the way.

Bitcoin’s introduction in 2009 marked the birth of crypto. Conceived as a decentralised, peer-to-peer means of transferring value on a shared public ledger, Bitcoin challenged the conventional notions of money and financial transactions. It brought to life the principle of decentralisation, where control and decision-making were distributed across a network of participants, negating the need for a central authority.

The report emphasises that Bitcoin, in its original formulation, was characterised by not being backed by any asset and by a stated claim to reduce the influence of intermediaries. These properties set the stage for the emergence of a new financial landscape — the crypto ecosystem.

Source: https://www.bis.org/publ/othp72.pdf

The advent of Ethereum introduced a new level of programmability to blockchain technology. Ethereum’s smart contract capabilities opened the door to myriad possibilities, culminating in the DeFi boom. DeFi, short for decentralized finance, uses self-executing smart contracts to recreate and improve upon traditional financial services, such as lending, borrowing, and trading, bypassing the need for intermediaries.

However, as crypto started attracting broader attention from potential investors, centralised entities played a significant role in channeling funds into crypto coins. Centralised exchanges, which facilitated the conversion between Bitcoin, other cryptoassets, and fiat money, contributed to rising crypto prices. This phenomenon, known as Centralised Finance (CeFi), has had a significant impact on the crypto ecosystem, contributing to the volatility of crypto asset prices.

The report brings to light the paradoxical role of centralisation in the crypto ecosystem, highlighting how, despite the decentralisation ethos of crypto, centralised entities have come to play a significant role. This development underscores the interplay between market dynamics, investor behaviour, and the principles of decentralisation in shaping the growth and development of the crypto ecosystem.

As we delve deeper into the subsequent chapters, we’ll explore the key components of the crypto ecosystem, the emerging risks, and the strategies proposed by the BIS to mitigate these risks. The journey from Bitcoin’s inception to today’s multifaceted crypto ecosystem is a testament to human ingenuity and the transformative power of technology. As we look to the future, understanding these dynamics and transformations is crucial for navigating the complex world of crypto.

The Crypto Ecosystem

As we delve deeper into the world of cryptocurrencies, the BIS report presents an enlightening examination of the crypto ecosystem’s key components. The report shines a light on the intricate network of protocols, platforms, and assets that form the crypto world, with a special focus on DeFi and stablecoins.

Decentralised Finance, or DeFi, is an innovation that has significantly shaped the crypto ecosystem. By leveraging the transparency and decentralisation inherent in blockchain technology, DeFi recreates traditional financial instruments in a decentralized, open-source environment. DeFi protocols allow financial transactions to occur directly between participants, mediated by smart contracts on a blockchain.

Source: https://www.bis.org/publ/othp72.pdf

The report highlights a pivotal challenge within DeFi: the ‘oracle problem’. Oracles are third-party services that feed real-world data into the blockchain for smart contracts to function correctly. The reliance on oracles introduces potential vulnerabilities and points of centralisation in DeFi systems. If an oracle provides inaccurate information, it can trigger incorrect execution of a smart contract, leading to significant financial losses.

Stablecoins, another key component of the crypto ecosystem, serve as a bridge between traditional fiat currencies and the digital crypto world. These digital tokens are designed to maintain a stable value relative to a specific asset or a pool of assets. Stablecoins have gained traction due to their potential to mitigate the notorious volatility of cryptocurrencies.

However, the report casts light on the inherent risks associated with stablecoins. It underscores that stablecoins’ value is reliant on the stability of the underlying asset and the credibility of the issuer, both of which can pose significant risks. The collapse of the TerraUSD stablecoin, which the report discusses in detail, serves as a case study illustrating these vulnerabilities.

By dissecting these key components of the crypto ecosystem, the BIS report provides a comprehensive understanding of the current state of the crypto world. It recognises the transformative potential of innovations like DeFi and stablecoins, while also emphasising the importance of understanding and addressing the associated risks. As we navigate this intricate ecosystem, this balanced perspective is crucial for appreciating its potential and preparing for its challenges.

Case Study — The TerraUSD Stablecoin Collapse

Source: https://www.bis.org/publ/othp72.pdf

The BIS report provides a concrete illustration of the vulnerabilities within the crypto ecosystem through a case study of the TerraUSD (UST) stablecoin collapse. This event underscores the risks associated with stablecoins and offers important lessons for the crypto world.

TerraUSD, a stablecoin pegged to the US dollar, was designed to maintain a one-to-one value ratio with the US dollar. The mechanism used to maintain this peg involved the convertibility of UST to another cryptocurrency on the Terra blockchain, Luna. However, when this mechanism faltered, it set off a chain of events leading to a crisis.

The report outlines that the collapse was triggered by a loss of confidence among investors in the ability of the Terra blockchain to maintain the dollar peg. As doubts arose, investors rushed to redeem their UST for Luna, leading to a sharp fall in UST’s price and a breakdown of its peg to the dollar.

The TerraUSD collapse underscores the inherent risks associated with stablecoins, a topic that the BIS report thoroughly explores. It shows how stablecoins, despite their promise of stability, are vulnerable to crises of confidence and mechanisms of peg maintenance.

However, the report also highlights the resilience of the crypto ecosystem in the face of such crises. In response to the collapse, the community rallied, and recovery mechanisms were activated to mitigate the damage. The report discusses these efforts in detail, providing insights into the potential for recovery and adaptation within the crypto ecosystem.

The TerraUSD case serves as a valuable lesson about the importance of trust, transparency, and robust safeguards in the crypto ecosystem. It shows that while the crypto world is full of opportunities, it is also fraught with risks that need to be carefully managed. By learning from such events, we can better navigate the crypto landscape and work towards more sustainable and resilient solutions.

Challenging Claims of Decentralisation

Source: https://www.bis.org/publ/othp72.pdf

The principle of decentralisation lies at the heart of the crypto world. It’s the idea that control and decision-making are spread across a network of participants, rather than being concentrated in a single central authority. However, the BIS report probes deeper into these decentralisation claims, challenging some of the commonly held perceptions in the crypto and DeFi ecosystems.

DeFi, despite its revolutionary potential, is not as decentralised as it might appear at first glance. While it’s true that DeFi platforms are built on decentralised blockchain networks, the report points out that decision-making within these platforms can often be surprisingly centralised. A small group of developers or governance token holders often hold sway over key decisions, creating a concentration of power that contradicts the ethos of decentralisation.

This concentration of decision-making power introduces new risks. It could make DeFi platforms more susceptible to manipulation or poor decision-making by a select few. It could also increase regulatory scrutiny if these platforms are seen as centrally managed financial intermediaries, potentially attracting more stringent regulatory requirements.

In the realm of stablecoins, despite operating on decentralised blockchains, there is a heavy reliance on centraisedl entities for their operation. The issuers of stablecoins have significant control over the operation of these coins, including the management of the reserves that back the coins. This dependence on a central entity contradicts the principle of decentralisation and introduces potential risks.

The BIS report’s analysis underscores the importance of critically examining claims of decentralisation in the crypto ecosystem. It serves as a reminder that the presence of blockchain technology does not automatically imply decentralisation, and that a more nuanced understanding is required. As we navigate the crypto landscape, it’s essential to keep these complexities in mind and to question assumptions about decentralisation.

Centralisation in Crypto Trading

Source: https://www.bis.org/publ/othp72.pdf

One of the most intriguing aspects of the crypto world is the trading of crypto assets. The BIS report provides a fascinating exploration of this domain, specifically highlighting the centralised nature of crypto trading.

Contrary to the decentralisation ethos of the crypto world, the report points out that most crypto trading takes place on centralised exchanges (CEXs). These platforms function as intermediaries between buyers and sellers, similar to traditional stock exchanges. They offer users an interface for trading crypto assets, often providing features like liquidity, speed, and ease of use that can be challenging to replicate on decentralised platforms.

However, these CEXs also carry risks. Unlike their counterparts in traditional finance, they’re not subject to the same levels of regulation and oversight. This lack of regulation can expose users to a range of potential dangers, from operational risks like system failures or hacks, to financial risks such as the mismanagement of user funds.

The report also highlights the disparity between CEXs and decentralised exchanges (DEXs). While DEXs offer a more aligned vision with the decentralisation principle of the crypto world, they are often less user-friendly and have lower liquidity, making them less appealing to the average user.

In essence, the BIS report paints a sobering picture of the risks within the crypto ecosystem. It serves as a valuable reminder that while the world of crypto offers exciting opportunities, these come with significant risks. Understanding these risks is crucial for anyone venturing into this dynamic ecosystem.

Risks Within the Crypto Ecosystem

The crypto landscape, for all its innovation and promise, is not without its risks. The BIS report delves into these risks, providing a comprehensive examination of the challenges lurking within the crypto ecosystem.

The report highlights that most activities within the crypto ecosystem involve exchanging one stablecoin or cryptocurrency for another. These transactions, while providing liquidity and facilitating trading within the crypto ecosystem, rarely finance activities in the real economy. This self-referential nature of the crypto ecosystem can lead to excessive speculation and volatility, posing significant risks to investors.

Moreover, the report brings attention to the operational risks inherent in DeFi. Smart contracts and oracles, though revolutionary, introduce new vulnerabilities. Smart contracts can have bugs or security flaws, and oracles, which feed external data into the blockchain, can be manipulated or compromised. These vulnerabilities can lead to substantial financial losses for users of DeFi platforms.

The report also explores the risks associated with the interconnectedness of DeFi protocols. Many DeFi protocols interact with multiple other protocols, creating a complex web of interdependencies. While this interconnectedness enables a high degree of composability and innovation, it can also amplify the speed at which financial contagion can spread within the DeFi ecosystem.

In essence, the BIS report paints a sobering picture of the risks within the crypto ecosystem. It serves as a valuable reminder that while the world of crypto offers exciting opportunities, these come with significant risks. Understanding these risks is crucial for anyone venturing into this dynamic ecosystem.

Addressing the Risks in Crypto

As the BIS report lays bare the various risks within the crypto ecosystem, it doesn’t leave us without solutions. It proposes strategies to mitigate these risks and ensure the sustainable growth of the crypto landscape.

One strategy is containment. This involves limiting the size and interconnections of the crypto ecosystem to the rest of the financial system to prevent the spillover of risks. However, as the report points out, containment is challenging due to the global and borderless nature of the crypto world.

The report also considers regulation as a key tool. By establishing clear regulatory standards for crypto activities, policymakers can ensure investor protection, financial stability, and legal certainty. However, the report cautions that regulation needs to be carefully designed to avoid stifling innovation. It also points out that due to the global nature of the crypto ecosystem, international cooperation is crucial for effective regulation.

In some jurisdictions, outright bans have been imposed on certain crypto activities. While this approach can effectively eliminate the associated risks, it also prevents the potential benefits of these activities.

The report further suggests that public authorities can encourage innovation within the traditional financial system, such as through central bank digital currencies (CBDCs). CBDCs could potentially offer many of the benefits associated with crypto, like faster and cheaper transactions, while being subject to robust regulatory oversight.

In sum, the BIS report emphasizes that while the crypto world carries significant risks, there are ways to address these risks. With the right mix of regulation, innovation, and international cooperation, it’s possible to harness the benefits of crypto while keeping the risks in check.

Addressing Data Gaps — Project Atlas

The BIS report introduces an ambitious initiative known as Project Atlas. Spearheaded by the BIS Innovation Hub Eurosystem Centre, the Deutsche Bundesbank, and De Nederlandsche Bank, Project Atlas aims to tackle a significant challenge in the crypto world; data gaps.

Project Atlas seeks to create a comprehensive view of crypto markets by combining reported data from crypto exchanges and stablecoin issuers with data from public blockchains. This approach could provide unprecedented transparency into the operations of the crypto ecosystem and enhance our understanding of its intricacies.

Data is crucial for understanding the risks and opportunities within the crypto world. However, obtaining reliable and comprehensive data in this rapidly evolving field is challenging. Project Atlas represents a promising step towards overcoming these data challenges.

By addressing these data gaps, Project Atlas could aid in developing effective regulatory strategies and foster a safer and more transparent crypto ecosystem. In essence, Project Atlas underscores the importance of data and transparency in navigating the dynamic world of crypto.


In the dynamic world of cryptocurrencies, where innovation and risk go hand-in-hand, the BIS report serves as a comprehensive guide. It demystifies the complexities of the crypto ecosystem, sheds light on its transformative potential, and confronts the challenges it faces.

The report takes us on a journey through the world of DeFi, the rise of stablecoins, and the reality of centralisation in crypto trading. It exposes the vulnerabilities within the crypto ecosystem and presents strategies for addressing these risks. From containment and regulation to outright bans, it explores a range of policy responses being employed across different jurisdictions.

However, the report also underscores the innovative spirit that fuels the crypto world. The introduction of Project Atlas highlights the commitment to harnessing this innovation to create a more transparent and secure crypto ecosystem.

In conclusion, while the report acknowledges the groundbreaking potential of crypto, it also underlines the need for careful navigation, robust safeguards, and informed policymaking. The world of crypto is undoubtedly filled with opportunities, but it’s essential to approach it with a clear understanding of its complexities and potential risks.

As we look to the future, let’s remember that every challenge in the crypto world is an opportunity for innovation. With knowledge, vigilance, and the spirit of innovation, we can navigate the crypto landscape and unlock its full potential.

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