Crypto and DeFi May Widen Wealth Gap, Destabilize Finance: BIS Report Warns

Crypto and DeFi May Widen Wealth Gap, Destabilize Finance: BIS Report Warns

The growing influence of cryptocurrencies and decentralized finance (DeFi) is sounding alarms among global financial regulators. In a new report released on April 15, the Bank for International Settlements (BIS) warned that the mass adoption of crypto assets may pose significant risks to financial stability and could exacerbate wealth inequality.

The BIS — often regarded as the “central bank for central banks” — stated that the number of participants and the volume of capital in crypto and DeFi markets have reached what it called a "critical mass." As these alternative financial systems expand, so too do the potential threats to traditional finance (TradFi) and the broader economy.

BIS report on crypto and DeFi’s functions and financial stability implications. Source: BIS

“Investor protection has become a significant concern for regulators,” the report emphasized.

Stablecoins Under Scrutiny

The report specifically highlighted the growing role of stablecoins — digital tokens pegged to fiat currencies like the U.S. dollar — as key instruments for transferring value within crypto ecosystems. However, the BIS cautioned that these instruments, if not properly regulated, could introduce vulnerabilities into the global financial system.

Source: Financial Services GOP

To counter this, the BIS is calling for targeted regulation around stablecoins, including:

Reserve asset requirements

Redemption guarantees during times of market stress

These recommendations are aimed at ensuring that stablecoins can be reliably exchanged for U.S. dollars, even under extreme market volatility.

The BIS report aligns with ongoing efforts in the U.S. to regulate stablecoins. On April 2, the U.S. House Financial Services Committee passed the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act with a 32–17 vote. The act seeks to enforce transparency and establish a clear legal framework for dollar-backed stablecoins.

Meanwhile, the GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins) also gained traction, passing the Senate Banking Committee on March 13 by a vote of 18–6. The GENIUS Act proposes robust collateralization rules and mandates compliance with anti-money laundering (AML) regulations for stablecoin issuers.

Widening Wealth Inequality Through Crypto

Beyond financial system risks, the BIS raised red flags about the socioeconomic impact of crypto markets, particularly their potential to worsen wealth inequality. The report pointed to evidence from the 2022 crypto market crash — specifically the collapse of FTX — which showed that retail investors often bore the brunt of losses.

Whale vs retail activity after FTX collapse. Source: BIS

“As prices tumbled in 2022, users actually traded more,” the BIS observed. “Most disturbingly, large bitcoin holders (‘whales’) were selling as ordinary retail investors (‘krill’) were buying.”

This pattern reveals a troubling trend: crypto, which is often promoted as a tool for financial inclusion and empowerment, may in fact be enabling a redistribution of wealth from less wealthy participants to wealthier insiders.

DeFi and TradFi: Similar Roots, New Risks

While DeFi and traditional finance share similar economic fundamentals, the BIS report underscores that DeFi’s unique features — such as smart contracts and composability — introduce novel risks that current regulatory frameworks are ill-equipped to manage.

The BIS concludes that while innovation must be supported, it is equally important to implement proactive regulation that protects investors and safeguards systemic stability.

As crypto and DeFi continue to evolve, the report serves as a clear call to action for regulators worldwide: close the gap between innovation and oversight before the next financial disruption emerges from the blockchain frontier.