Cryptocurrency boom poses new global financial stability challenges, says IMF

*The International Monetary Fund cautions economies that ‘cryptoisation’ can reduce the ability of central banks to effectively implement monetary policy, aside from creating financial stability risks and ‘consumer protection risks’

Isola Moses | ConsumerConnect

In view of the rising popularity of the crypto market, the International Monetary Fund (IMF) has warned economies that crypto boom poses new challenges to financial stability in countries around the world.

The global lender in a blog post published Friday, October 1, 2021, stated: “Cryptoisation can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks.”

Cryptocurrencies

ConsumerConnect gathered the IMF’s post titled, “Crypto Boom Poses New Challenges To Financial Stability”, was authored by three financial experts from the IMF’s Monetary and Capital Markets Department: Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou.

It further noted that “the total market value of all the crypto assets surpassed $2 trillion as of September 2021 — a 10-fold increase since early 2020.”

According to IMF, 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.”

“Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarisation forces in the economy — or in this case cryptoisation — where residents start using crypto assets instead of the local currency,” said the authors.

The IMF experts further described that cryptoisation can reduce the ability of central banks to effectively implement monetary policy.

It could also create financial stability risks.

They also said: “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.”

In terms of the measures to address the market, they suggested policy action, they wrote that “as crypto assets take hold, regulators need to step up.

“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.

“The global nature of crypto assets means that policymakers should enhance cross-border coordination to minimise the risks of regulatory arbitrage and ensure effective supervision and enforcement.”

The IMF experts then 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.”

According to them, 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.

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