Banking in the Shadow of Bitcoin? The Institutional Adoption of Cryptocurrencies

25 Pages Posted: 13 Apr 2023

See all articles by Raphael Auer

Raphael Auer

Bank for International Settlements (BIS)

Marc Farag

Bank for International Settlements (BIS)

Ulf Lewrick

Bank for International Settlements (BIS) - Monetary and Economic Department; University of Basel - Faculty of Business and Economics

Lovrenc Orazem

Bank for International Settlements (BIS)

Markus Zoss

Bank for International Settlements (BIS)

Date Written: 2023

Abstract

The phenomenal growth of cryptocurrencies raises important questions about their footprint on the financial system. What role are traditional financial intermediaries playing in cryptocurrency markets and what drives their engagement? Are new nodes emerging? We help answer these questions by leveraging a novel global supervisory database of banks’ cryptocurrency exposures and by synthesising a range of complementary data sources for other types of institutions. We find that major banks’ exposures currently remain at very modest levels. Across countries, higher innovation capacity, more advanced economic development, and greater financial inclusion are associated with a higher likelihood of banks taking on cryptocurrency exposures. We show that substantial activity is concentrated in lightly regulated crypto exchanges. This “shadow crypto financial system” serves both retail and institutional clients, such as dedicated investment funds. An uneven regulatory treatment across banks and crypto exchanges and significant data gaps suggest that a proactive, holistic and forward-looking approach to regulating and overseeing cryptocurrency markets is needed. It should focus on ensuring a more level playing field with regard to financial services provided by established financial institutions and intermediaries in the emerging crypto shadow financial system by introducing more stringent regulatory and supervisory oversight for the latter.

Keywords: cryptocurrencies, decentralised finance, digital currencies, financial regulation, financial supervision, exchange stablecoin, Bitcoin, Ethereum

JEL Classification: E420, G120, G210, G230, G280, O330

Suggested Citation

Auer, Raphael and Farag, Marc and Lewrick, Ulf and Orazem, Lovrenc and Zoss, Markus, Banking in the Shadow of Bitcoin? The Institutional Adoption of Cryptocurrencies (2023). CESifo Working Paper No. 10355, Available at SSRN: https://ssrn.com/abstract=4416784 or http://dx.doi.org/10.2139/ssrn.4416784

Raphael Auer (Contact Author)

Bank for International Settlements (BIS) ( email )

Marc Farag

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Ulf Lewrick

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

Lovrenc Orazem

Bank for International Settlements (BIS) ( email )

Markus Zoss

Bank for International Settlements (BIS) ( email )

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