The International Monetary Fund (IMF) has said some emerging markets and developing economies face immediate and serious risks of currency substitution by crypto assets.
The IMF disclosed this in a report titled, ‘Global Crypto Regulation Should be Comprehensive, Consistent, and Coordinated’ released on Thursday.
In the report, the IMF said its mandate is to safeguard the stability of the international monetary and financial system.
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 stable coins.
“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”.
Cryptoisation
The Washington DC-based fund said, “Some emerging markets and developing economies face more immediate and acute risks of currency substitution through crypto assets, the so-called cryptoization.
“Capital flow management measures will need to be fine-tuned in the face of cryptoization. This is because applying established regulatory tools to manage capital flows may be more challenging when value is transmitted through new instruments, new channels and new service providers that are not regulated entities.”
According to the IMF, crypto assets will soon pose systemic financial stability in some countries as policymakers struggle to monitor risks.
It added that crypto assets were drastically changing the financial system it was trying to protect.
The IMF said, “Crypto assets and associated products and services have grown rapidly in recent years. Furthermore, inter-linkages 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 $2.5tn market capitalisation indicates a significant economic value of the underlying technological innovations such as the blockchain, it might also reflect froth in an environment of stretched valuations.”
According to the international fund body, identifying, monitoring, and management of crypto-related risks continues to defy regulators and firms.
It added that in developing economies, for instance, cryptoization was threatening to replace domestic currency, and circumvent exchange restrictions and capital account management measures.
The IMF said, “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.”
