International Monetary Fund warns crypto-related risks could soon become systemic

Wants comprehensive, consistent, and coordinated regulation to avoid instability


The International Monetary Fund (IMF) has called for global, comprehensive, consistent, and coordinated regulation to protect the stability of the world's financial systems.

That stern call was made yesterday in a post by Tobias Adrian, director of the IMF's Monetary and Capital Markets Department, and his deputies Dong He and Aditya Narain.

The three write that while the $2.5 trillion market capitalisation of cryptocurrency potentially does indicate that blockchain and other crypto-related innovations have real value, it may also "reflect froth in an environment of stretched valuations".

The risk of rapid falls in value is not the only thing the trio fear.

"Identification, monitoring, and management of risks defy regulators and firms," they wrote, explaining crypto exchanges and wallets pose "operational and financial integrity risks". Scanty investor protections are another worry.

The authors also fear some stablecoins have inadequate reserves and offer "inaccurate disclosure".

Despite those problems, some markets – and nations – have raced to use cryptocurrencies. By doing so, they "replace domestic currency, and circumvent exchange restrictions and capital account management measures".

"Such risks underscore why we now need comprehensive international standards that more fully address risks to the financial system from crypto assets, their associated ecosystem, and their related transactions, while allowing for an enabling environment for useful crypto asset products and applications," the three write.

Those rules need to be international because cryptocurrency easily crosses borders. While individual nations are adapting current regulations or devising new ones, the three fear "existing laws and regulations may not allow for national approaches that comprehensively cover all elements of these assets".

The result could be dangerous loopholes. "Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows," the authors observe.

The trio suggest three regulations:

  • Licensing of crypto-asset service providers that store, transfer, or settle cryptos, or have custody of reserves and assets. Licences should follow current requirements for financial service providers;
  • The different uses of cryptocurrency – such as trading it as an asset, or transacting with a stablecoin – should each be regulated with appropriate rules modelled on existing approaches. Crypto investments should therefore be regulated in the same way as securities, and by the same regulators. Services and products for payments should have requirements similar to those of bank deposits, overseen by the central bank or the payments oversight authority.
  • Banking, securities, insurance, and pension regulators should set capital and liquidity requirements and limits on exposure to different types of crypto assets and require investor suitability and risk assessments.

Predictably, the authors suggest the IMF's Financial Stability Board should use its existing coordinating role to develop a global framework for these regulations.

"The objective should be to provide a comprehensive and coordinated approach to managing risks to financial stability and market conduct that can be consistently applied across jurisdictions, while minimizing the potential for regulatory arbitrage, or moving activity to jurisdictions with easier requirements.

"If we start now, we can achieve the policy goal of maintaining financial stability while reaping the benefits that the underlying technological innovations bring," the post suggests. ®


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