The International Monetary Fund (IMF) called for a “comprehensive, consistent, and coordinated” approach to harness the benefits of crypto’s underlying technology while mitigating its risks. The fund plans to work closely with the Financial Stability Board (FSB) and other members of the international regulatory community to develop an effective regulatory approach to crypto-assets.
In a recent blog post, the IMF acknowledged that crypto assets are rapidly revolutionizing the entire global financial system. However, policymakers still struggle to monitor the risks associated with the market.
According to the IMF, there is an urgent need for cross-border collaboration and cooperation to address the technological, legal, regulatory, and supervisory challenges associated with the adoption of cryptocurrencies.
“Setting up a comprehensive, consistent, and coordinated regulatory approach to crypto is a daunting task. But if we start now, we can achieve the policy goal of maintaining financial stability while benefiting from the benefits that the underlying technological innovations bring,” senior officials at the lender said in a note on December 9.
The fund’s commentary is by Tobias Adrian, director of the IMF’s monetary and capital markets department, Dong He, the deputy director of the monetary and capital markets department, and Aditya Narain, a deputy director in the IMF’s monetary and capital markets department.
The IMF said that the industry’s cross-sector and cross-border remit limits the effectiveness of national approaches. In addition, many cryptocurrency service providers operate across borders, making supervision and enforcement more complicated, the lender added.
Interest in cryptocurrencies and blockchain surges as investors and people flock to digital assets and online payments gain pace. As a result, a growing number of institutional investors and wealth managers plan to increase their exposure to crypto assets between now and 2023, according to a survey by Nickel Digital Asset Management, based in London.
“Determining valuation is not the only challenge in the cryptocurrency ecosystem: identification, monitoring, and management of risks defy regulators and firms,” the IMF officials said in their commentary.
Some of these risks include operational and financial integrity risks from cryptocurrency asset exchanges and wallets, investor protection and inadequate reserves, and inaccurate disclosure for some stablecoins, the fund’s commentary read.
The advent of cryptocurrency can accelerate “cryptoization” in emerging markets and developing economies – when so-called digital assets replace domestic currency and circumvent exchange restrictions and capital account management measures, they said, obviously hinting at El Salvador’s recent moves.
According to IMF officials, the risks underscore the need for “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 organization recommended the Financial Stability Board (FSB), which reports to the Group of 20 nations, to develop a global framework comprising standards for regulation of cryptocurrency assets to provide a comprehensive and coordinated approach to managing risks to financial stability and market conduct that can be consistently applied across jurisdictions.
The fund said it will work closely with the FSB and other members of the international regulatory community to develop an effective regulatory approach to cryptocurrency assets.
“The global regulatory framework should provide a level playing field along with the activity and risk spectrum,” IMF officials said.
As per the IMF’s recommendations, the framework should stipulate that those crypto-asset service providers are licensed or authorized to deliver critical functions. Licencing and authorization criteria should be clearly articulated, the responsible authorities clearly designated and coordination mechanisms among them well defined.
Also, the lender said that authorities should provide clear requirements to regulated financial institutions concerning their exposure to and engagement with cryptocurrency.
According to the IMF, the framework should also mandate that requirements be tailored to the main use cases of cryptocurrency assets and stablecoins.
“For example, services and products for investments should have requirements similar to those of securities brokers and dealers, overseen by the securities regulator. Regardless of the initial authority for approving crypto services and products, all overseers – from central banks to securities and banking regulators – need to coordinate to address the various risks arising from different and changing uses,” IMF officials said.
Earlier in July, shortly after El Salvador adopted Bitcoin as legal tender, the IMF warned that using crypto as a national currency is very risky.
Also, The Bank for International Settlements (BIS) had claimed last week that decentralization in decentralized finance (DeFi) is an illusion and argued that policymakers should regulate the sector. The bank also called for global “systemic regulation” to oversee banking activity outside traditional financial institutions, as DeFi poses stability risks.