IMF report warns of rising cryptocurrency risks and calls for regulatory action

On Tuesday, The International Monetary Fund (IMF) issued a report on global financial stability, detailing how a spike in crypto trading could disrupt the global financial system and demanding “strengthening macroeconomic policies.” Also, the war in Ukraine is revealing the risks of crypto payment systems, the IMF said.

The IMF has published the “Global Financial Stability Report,” which discussed numerous subjects, including Bitcoin and other cryptocurrencies disrupting the payments system, crypto being used to evade sanctions, inflation, Russia’s invasion of Ukraine, banking infrastructure, central bank challenges of maintaining credibility, energy security, and many others.

An essential reason for the IMF’s concern is the worldwide implications of the invasion of Ukraine. The report states that through poor market liquidity, counterparty risks, funding strains and the overexposure of financial institutions being strangled throughout the invasion, these conditions led to “cryptoization,” or what many Bitcoiners would refer to as hyperbitcoinization.

The IMF highlights the increased use of cryptocurrencies in emerging markets since the start of the pandemic, noting that trading volumes of crypto assets against some emerging market currencies have spiked since the West sanctioned Russia.

Tether – the largest stablecoin used to settle spot and derivative trades – has seen a spike in trading volumes against emerging market currencies. That spike is particularly notable in Turkey, where exchange rate volatility has been high, and the overall use of crypto assets has gained traction over the last few years.

Although a large part of the uptick stems from speculative investors, a shift towards using crypto as a means of payment could create challenges for policymakers, says the IMF.

The war in Ukraine has also shined the light on the risks of crypto payment systems, which by nature are decentralized. The lack of a centralized payment system makes it harder to track illicit activity for crypto and to enforce sanctions, especially as international payments have increased.

The IMF warns cryptocurrency exchanges that don’t comply with sanctions or properly monitor illegal activity could be used to circumvent sanctions. At the same time, they say, the technology crypto uses increase the secrecy of transactions, allowing dealings to be covered up more easily.

The IMF is also concerned about the quantity of central bank digital currencies (CBDC) being developed. As the system fragments and central banks become even more autonomous, the current banking infrastructure is left in a deluge of exponential technological advancements cascading into a game of keep up.

“To fend off cryptoization risks, strengthening macroeconomic policies is necessary but may not be sufficient given the unique challenges posed by the crypto ecosystem,” the report states.

The IMF mentions that CBDCs may stagnate some of the growth being experienced by bitcoin and other cryptocurrencies with the emergence of central bank digital currencies. This opinion is based on the assumption that CBDCs will function as a superior monetary network, thereby taking away some of the demand from other currencies. The report then calls for global cooperation and precise actions from lawmakers to prevent further fragmentation of the global payments infrastructure.

To safeguard the financial system against risks from cryptocurrencies, the IMF recommends policymakers develop global standards for crypto assets, noting that stronger oversight of fintech firms and decentralized finance platforms is needed to mitigate their risks.

The international body recommends policymakers develop coordinated regulations for crypto assets to manage capital flows, create international collaboration, address data gaps and leverage technology. Regulators should also create a Financial Action Task Force to enforce standards to guard against illicit capital flows, the IMF said.