IMF Report Calls For A Coordinated Regulatory Approach To Crypto
The International Monetary Fund (IMF) in its latest report is calling for global policymakers to develop standards for crypto in response to growing concerns.
IMF Global Financial Stability report highlights that the war in Ukraine — following on the heels of the coronavirus pandemic — has led to a tightening of global financial conditions. Fast developing fintech and the uses and misuses of crypto are adding more to the challenges that the global economy faces.
The pandemic and war have led to an accelerated “cryptoization” in emerging markets due to increased speculative interest during the pandemic and then attempts to evade sanctions, the report said.
The report also noted that due to compliance within the crypto industry, the use of cryptocurrency to evade sanctions is impractical. However, the use of mixers, decentralized exchanges and privacy coins may allow some circumvention, but it would be restricted by limited liquidity.
Another risk the report highlighted is the use of excess energy – by sanctioned countries – to mine proof-of-work cryptocurrencies, although financial flows from that activity would also be relatively contained.
Countries that have concerned to be sanctioned in the future may find crypto more attractive as reserve currency — and major fiat currencies less so — thanks to the greater difficulty in immobilizing crypto.
All the above drive the need for a coordinated regulatory approach to crypto for maintaining effective control of capital flows. Improving non-blockchain payment technologies would also help maintain that control.
Regulation is not keeping up with the rapid developments in many aspects of fintech, the report stated. Decentralized finance (DeFi) is becoming steadily more interconnected with traditional finance due to its adoption by traditional financial institutions. The problem is that DeFi’s lack of governance makes it a risk to financial stability and creates an environment of legal uncertainty. It is vulnerable to market, liquidity and cyber risks, but it potentially offers benefits from higher efficiency and financial inclusion.
IMF’s recommendation to regulators is to concentrate on the elements of the crypto ecosystem surrounding DeFi, such as stablecoin issuers and centralized exchanges, and encourage the creation of self-regulating bodies within the industry.
