Greater financial instability, fraud and funding of terrorism likely unless governments toughen supervision, fund says
Last modified on Fri 1 Oct 2021 09.02 EDT
Tougher regulation is needed to prevent the rapid growth in cryptocurrencies leading to financial instability, defrauding of consumers and the funding of terrorism, the International Monetary Fund has said.
The Washington-based IMF said the 10-fold increase in the market value of crypto assets – digital or virtual currencies – to more than $2tn since early 2020 required more active and collaborative supervision by governments.
In a chapter from its forthcoming Global Financial Stability Report, the IMF said many of the new cryptocurrencies lacked robust governance and risk practices.
What is cryptocurrency?
Cryptocurrencies are an alternative way of making payments to cash or credit cards. The technology behind it allows the ‘money’ to be sent directly to others without it having to pass through the banking system. For that reason they are outside the control of governments and are unregulated by financial watchdogs – and transactions can be made in a way that keeps you reasonably pseudonymous.
If you own a crypto-asset you control a secret digital key that you can use to prove to anyone on the network that a certain amount of that asset is yours. If you spend it, you tell the entire network that you have transferred ownership of it, and use the same key to prove that you are telling the truth. Over time, the history of all those transactions becomes a lasting record of who owns what: that record is called the blockchain.
Bitcoin was one of the first and biggest cryptocurrencies and has been on a wild ride since its creation in 2009, sometimes surging in value as investors have piled in – and occasionally crashing back down. Dogecoin – which started as a joke – has also seen a stratospheric rise in value.
Sceptics warn that the lack of central control make crypto-assets ideal for criminals and terrorists, while libertarian monetarists enjoy the idea of a currency with no inflation and no central bank.
The whole concept of cryptocurrencies has been criticised for its ecological impact, with “mining” for new coins requiring vast energy reserves and the associated carbon footprint of the whole system.
Richard Partington and Martin Belam
Dimitris Drakopoulos, Fabio Natalucci and Evan Papageorgiou, authors of the chapter, said in a blog that crypto exchanges had faced significant disruptions during periods of market turbulence. “There are also several high-profile cases of hacking-related thefts of customer funds. So far, these incidents have not had a significant impact on financial stability. However, as crypto assets become more mainstream, their importance in terms of potential implications for the wider economy is set to increase,” they said.
The blog noted the substantial risks to consumers from inadequate disclosure and oversight, given that some currencies were “likely created solely for speculation purposes or even outright fraud. The (pseudo) anonymity of crypto assets also creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing.”
The IMF also highlighted potential problems with the four-fold increase in the supply of stablecoins – cryptocurrencies that aim to peg their value, usually against the US dollar – to $120bn (£88bn) during 2021.
The blog said: “Given the composition of their reserves, some stablecoins could be subject to runs, with knock-on effects to the financial system. The runs could be driven by investor concerns about the quality of their reserves or the speed at which reserves can be liquidated to meet potential redemptions.”
Last month, China made transactions in cryptocurrencies illegal, but the IMF said emerging and developing countries appeared to be leading the way with their use. This risked damaging the ability of central banks to effectively implement monetary policy and potentially created financial stability risks, it added.
“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 said.
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