IMF Sees New Challenges to Financial Stability from Crypto

IMF Sees New Challenges to Financial Stability from Crypto – The International Monetary Fund (IMF) warned about the risks posed by the cryptocurrency boom in a blog post published Friday. The post, titled “Crypto boom poses new challenges to financial stability,” is authored by three financial experts from the IMF’s Monetary and Capital Markets Department: Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou.

Noting that “The total market value of all the crypto assets surpassed $2 trillion as of September 2021 — a 10-fold increase since early 2020,” they said that many entities in the ecosystem “lack strong operational, governance, and risk practices.” These include exchanges, wallets, miners, and stablecoin issuers.

The authors proceeded to discuss “Consumer protection risks,” stating that they “remain substantial given limited or inadequate disclosure and oversight.”

They warned: “Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarization forces in the economy — or in this case cryptoization — where residents start using crypto assets instead of the local currency.” The IMF experts further described:

Cryptoization can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks.

Moreover, they stated: “Threats to fiscal policy could also intensify, given the potential for crypto assets to facilitate tax evasion. And seigniorage (the profits accruing from the right to issue currency) may also decline. Increased demand for crypto assets could also facilitate capital outflows that impact the foreign exchange market.”

The authors also suggested policy action. “As crypto assets take hold, regulators need to step up,” they wrote.

“As a first step, regulators and supervisors need to be able to monitor rapid developments in the crypto ecosystem and the risks they create by swiftly tackling data gaps,” they detailed. “The global nature of crypto assets means that policymakers should enhance cross-border coordination to minimize the risks of regulatory arbitrage and ensure effective supervision and enforcement.”

The IMF experts suggested: “National regulators should also prioritize the implementation of existing global standards. Globally, policymakers should prioritize making cross-border payments faster, cheaper, more transparent and inclusive through the G20 Cross Border Payments Roadmap.” They concluded:

Time is of the essence, and action needs to be decisive, swift and well-coordinated globally to allow the benefits to flow but, at the same time, also address the vulnerabilities.