The Bank for International Settlements (BIS) released a report on the 19th stating that crypto assets and decentralized finance (DeFi) have reached a "critical point" and pose a potential threat to global financial stability.

The BIS, known as the “central bank of central banks,” warned that the growing integration of crypto assets with the traditional financial system (TradFi) could endanger global financial stability.

Historically, cryptocurrency markets have operated largely in isolation from the traditional financial system.

However, with the approval of a Bitcoin (BTC) spot ETF by U.S. regulators in January 2024 and the rise of tokenization of real-world assets (RWA), trends in recent years have accelerated the integration between DeFi and traditional finance.

This development has enabled institutional investors and asset managers to increase their exposure to crypto assets through familiar investment channels, leading to an increasingly blurred boundary between the two systems.

The BIS report pointed out that although the new cryptocurrency market is still small compared to traditional markets, its growth rate and increased connectivity may create new paths for the spread of financial shocks, thereby exacerbating systemic vulnerabilities.

The term "tipping point" means that the influence of cryptocurrency is sufficient to have a substantial impact on the operation of the entire financial system.

One of the main concerns highlighted by the BIS is that crypto assets and DeFi could exacerbate wealth inequality.

According to data in the report, small individual investors tend to increase their holdings of crypto assets during market downturns, while wealthy investors choose to exit their positions.

This phenomenon ultimately leads to a net transfer of wealth from the poor to the rich.

This observation is consistent with earlier views by officials such as Ulrich Bindseil of the European Central Bank. Beindersell has pointed out that Bitcoin's structure is inherently more favorable to wealthy investors who enter the market early, rather than latecomers.

To mitigate these emerging risks, BIS strongly recommends that DeFi be subject to a regulatory framework similar to that of traditional finance.

These measures include: enforcing customer identification (KYC) requirements, increasing transparency through information disclosure, and ensuring that market participants have appropriate training and qualifications.

The goal of these measures is to reduce the risk of fraud, improve market health, and enhance investor protection.

The BIS’s call for regulatory consistency reflects a global trend to gradually integrate crypto asset regulation with the existing financial regulatory system in the face of a hybrid financial ecosystem.

The report emphasizes that in order to take advantage of DeFi innovations without undermining financial stability or widening socioeconomic inequalities, active regulation and meticulous supervision are indispensable.

The BIS report marks a formal recognition that crypto assets and DeFi have grown from niche markets to systemic presence.

Its rapid expansion and increasing links with traditional finance mean that we must adopt prudent regulatory and supervisory mechanisms to prevent systemic risks and narrow wealth gaps.