The Bank for International Settlements (BIS) has just issued an unprecedented warning

Behind this observation lies a paradox. While the crypto ecosystem prides itself on democratizing finance, according to the BIS, it could amplify inequalities and create unforeseen systemic risks.

The Bank for International Settlements (BIS) has just issued an unprecedented warning: cryptocurrencies and decentralized finance (DeFi) have crossed a critical threshold, threatening global financial stability.

According to the BIS, this observation is all the more striking given the difficulties encountered in integrating this sector, marked by extreme market volatility and a surprising redistribution of wealth.

Here is an analysis of a warning that is shaking the markets.

Critical Mass of Cryptos: An Underestimated Turning Point

Long perceived as a speculative niche, the crypto sector has now reached a critical size and composition. The authors highlight the role of Bitcoin ETFs, stablecoins, and the tokenization of real-world assets (RWA) in transforming the ecosystem.

These innovations, designed to bridge crypto and traditional finance (TradFi), have paradoxically increased contagion risks.

The first alarm signal is the smashing entry of asset management giants into the sector. BlackRock, Fidelity, and other institutional players have converted bitcoin into a “legitimate” financial product, attracting unprecedented capital. The result is an increased correlation between crypto prices and stock indices, erasing the myth of a disconnected market.

Then there is the tokenization of RWAs — real estate, bonds, precious metals — which promises to merge traditional and digital assets into one crucible. While this hybridization stimulates innovation, it also creates risky bridges. Imagine a tokenized real estate crash spreading via DeFi protocols: the consequences would be unpredictable.

Finally, stablecoins, these cryptos backed by traditional currencies, now play a central role. Tether and USDC serve as bridges between TradFi and DeFi, facilitating arbitrage and capital flows. But their opacity and sometimes questionable reserves make them ticking time bombs. The BIS insists: a stablecoin crisis could paralyze global payment systems and devastate the entire financial system.

Reverse Redistribution: When Crypto Widens Inequalities

One of the most disturbing charts in the report reveals a perverse mechanism. In times of crisis, small wallets increase their crypto exposure while savvy investors reduce theirs. Translation: the less wealthy buy the dip, hoping for a rebound, while insiders take profits and diversify their portfolios.

Ulrich Bindseil, from the European Central Bank (ECB), had already highlighted this phenomenon. According to him, bitcoin acts like a wealth pump, transferring capital from newcomers to earlier investors, who are often already wealthy.

Extreme market volatility amplifies this bias. Beginners, attracted by promises of quick gains and lured by market optimism, become victims of a rigged game. They persevere in a vicious circle of hope and despair, selling the highs and buying the lows, while the initiators calmly collect their chips.

Worse, DeFi, presented as an egalitarian alternative to traditional finance, is said to replicate its flaws. Overcollateralized loans at usurious rates, and "rug pulls" scams mainly penalize non-initiates. The BIS denounces an illusion of democratization: behind the libertarian rhetoric of Web3 hides an increasing concentration of capital.

Ultimately, the ultimate irony is that regulators, by delaying sector oversight, have allowed these imbalances to flourish. Without customer protection, market hygiene, or legal supervision, crypto becomes a global casino where the rules insidiously favor the most powerful.

Financial Innovation Versus Banks: Clash of Models?

The report by the Bank for International Settlements paints a bleak scenario of a toxic merger between DeFi and TradFi. Smart contracts, used outside any regulatory framework, would infiltrate traditional markets with unfettered speed and efficiency.

Decentralized exchange platforms (DEXs) would become systemic cogs, facilitating liquidity and price discovery without any supervision. This scenario presents a nightmare for regulators, who are used to controlling institutions and setting clear rules.

Faced with this threat, the authors propose a "containment" strategy, aiming to isolate crypto risks while allowing innovation to flourish. For example, banks wishing to tokenize assets should avoid so-called "permissionless" blockchains, deemed too risky due to the absence of controls and the speed of execution.

Another priority is to regulate DeFi according to the same standards as TradFi. Customer knowledge, protocol transparency, developer qualifications… The BIS proposes imposing obligations similar to those of traditional finance despite the decentralized nature of the sector. A bold idea, but one that is difficult to imagine in practice. How to regulate decentralized entities like DAOs (autonomous organizations) and ensure compliance with legal and regulatory norms?

Finally, stablecoins are in the crosshairs, and for good reason. Their central role in DeFi makes them potential points of failure that could quickly destabilize the entire system. A loss of confidence in Tether or a shortfall in its reserves could trigger a cascading panic, affecting not only crypto but also traditional markets. The BIS proposes mandatory reserves and regular, independent audits, an approach already adopted by the European Union with the upcoming Markets in Crypto-Assets (MICA) regulation.

The threat posed by crypto is not a matter of opinion; it is a subject of consensus among institutions. In December 2023, the International