The International Monetary Fund (IMF) warns that the growing popularity of cryptocurrencies poses new challenges to financial stability. Cryptography can reduce the ability of central banks to effectively implement monetary policy. It can also create risks to financial stability.”
IMF sees new challenges to financial stability from cryptocurrencies
The International Monetary Fund (IMF) warned of the risks posed by the cryptocurrency boom in a blog post published on Friday. The publication, “Cryptocurrency Boom Pose New Challenges for Financial Stability,” was written by three financial experts from the IMF’s Department of Money and Capital Markets: Dimitris Dracopoulos, Fabio Natalucci and Ivan Papajurgio.
Noting that “the total market capitalization of all crypto assets exceeded $2 trillion as of September 2021 – a 10-fold increase since early 2020,” they said, many 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,” noting that they “remain material due to limited or insufficient disclosure and oversight.”
They warned: “Looking ahead, broad and rapid adoption could pose significant challenges by strengthening the forces of dollarization in the economy – or in this case crypto – as residents begin to use crypto assets instead of local currency. IMF experts further described:
Cryptography can reduce the ability of central banks to effectively implement monetary policy. It can also lead to financial stability risks.
Moreover, they stated: “Threats to fiscal policy could intensify as well, given the potential for crypto assets to facilitate tax evasion. Currency exchange rates (profits from the right to issue currency) could also fall. An increased demand for crypto assets could also lead to facilitate capital outflows that affect the foreign exchange market.”
The authors also suggested policy actions. “As crypto assets take hold, regulators need to step up,” they wrote.
They explained that “as a first step, regulators and supervisors must be able to monitor rapid developments in the cryptocurrency ecosystem and the risks they create by quickly addressing data gaps.” “The global nature of crypto assets means that policy makers must enhance cross-border coordination to reduce regulatory arbitrage risks and ensure effective oversight and enforcement.”
IMF experts suggested: “National regulators should also prioritize implementation of existing global standards. Globally, policy makers should prioritize making cross-border payments faster, cheaper, more transparent and inclusive through the G20 Cross-Border Payments Roadmap” . They concluded:
Time is of the essence, and action must be decisive, rapid, and globally well-coordinated to allow the benefits to flow, but at the same time, address weaknesses as well.
What do you think of the fund’s warnings and proposals? Let us know in the comments section below.
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