The IMF’s mandate is to safeguard the stability of the international monetary and financial system, and crypto assets are changing the system profoundly.
Crypto assets and associated products and services have grown rapidly in
recent years. Furthermore, interlinkages with the regulated financial
system are rising. Policymakers struggle to monitor risks from this
evolving sector, in which many activities are unregulated. In fact, we
think these financial stability risks could soon become systemic in some
countries.
While the nearly $2.5 trillion market capitalization indicates
significant economic value of the underlying technological innovations
such as the blockchain, it might also reflect froth in an environment of
stretched valuations. Indeed, early reactions to the Omicron variant
included a significant crypto selloff.
Financial system risks from crypto assets
Determining valuation is not the only challenge in the crypto
ecosystem: identification, monitoring, and management of risks defy
regulators and firms. These include, for example, operational and
financial integrity risks from crypto asset exchanges and wallets,
investor protection, and inadequate reserves and inaccurate disclosure
for some stablecoins. Moreover, in emerging markets and developing
economies, the advent of crypto can accelerate what we have called
“cryptoization”—when these assets 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 Financial Stability Board, in its coordinating role, should
develop a global framework comprising standards for regulation of crypto
assets. 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.
Crypto’s cross-sector and cross-border remit limits the effectiveness
of national approaches. Countries are taking very different strategies,
and existing laws and regulations may not allow for national approaches
that comprehensively cover all elements of these assets. Importantly,
many crypto service providers operate across borders, making the task
for supervision and enforcement more difficult. Uncoordinated regulatory
measures may facilitate potentially destabilizing capital flows.
Standard-setting bodies responsible for different products and
markets have provided varying levels of guidance. For example, the
Financial Action Task Force has issued guidance for a risk-based
approach to mitigating financial integrity risks from virtual assets and
their service providers. Actions by other standard-setting bodies range
from broad principles for some types of crypto assets to rules for
mitigating exposure risks of regulated entities and setting up
information exchange networks. While useful, these efforts aren’t
sufficiently coordinated towards a global framework for managing the
risks to financial and market integrity, financial stability, and
consumer and investor protection...
moe at IMF
© International Monetary Fund
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