The crypto Wild West was a tough place. With few sheriffs around, and limited legislation and regulation, it was a land of crashes and criminals. Money laundering and other illicit activity has been estimated in the tens of billions of dollars per year.
It is a story of past, future, and present. It is a story of innovators and lawbreakers, of risks and opportunity. It is the story of crypto and blockchain.
Past
We begin with what feels like the dusty Wild West of American history.
Most crypto assets arrived on the financial scene “unbacked” or “poorly-backed” — lacking intrinsic value and suffering from price volatility. Some of them collapsed because of reliance on shaky reserves.
Crypto assets were really risky assets—many households have the scars to prove it. They lost real money. Lots of it.
The Wild West was a tough place. With few sheriffs around, and limited legislation and regulation, it was a land of crashes and criminals. Money laundering and other illicit activity has been estimated in the tens of billions of dollars per year.
Just last month, the founder of Binance, the world’s largest crypto currency exchange, pleaded guilty to charges of money laundering—right after the founder of FTX, a prominent exchange that crashed, was convicted of fraud and other crimes.
Put simply, in the past 15 years, the crypto industry has not built a glorious reputation. Nor is it out of the woods.
Future
Where might it go? Let’s look towards the future.
We must consider the effects if crypto assets became widespread. The scenario is not farfetched.
For one, crypto assets are not going away. Bitcoin is trading at its highest value since April 2022. The crypto market cap doubled over the last year. And still today people search for the word “Bitcoin” about 20 times more than “health and wellness,” and 7 times more than “climate change.”
Also, crypto asset adoption is high especially in emerging market economies like India, Nigeria, and Vietnam, according to Chainalysis, though data is scarce. In Brazil, for every 100 real spent on foreign securities 25 go into crypto assets, according to ongoing research by IMF staff.
The challenge is that high crypto asset adoption could undermine macro-financial stability.
For one, as our recent paper shows, crypto-ization—the use of a crypto asset instead of domestic currency—can undermine monetary policy transmission. What use is it to raise interest rates on a currency few people hold?
In addition, capital flow management measures—such as limits on foreign currency holdings—could be circumvented.
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© International Monetary Fund
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