IMF Calls for Coordinated, Global Crypto Regulation

In a blog post, the IMF warns “systemic” financial stability risks associated with the growth in crypto assets and calls for a global regulatory framework for the emerging asset class, observing, “Uncoordinated regulatory measures may facilitate potentially destabilising capital flows.”

The IMF says that the increasingly inter-linked nature of crypto and traditional financial markets makes it tough for policymakers to monitor risks because a large set of activity in crypto is unregulated. It adds that while the nearly $2.5 trillion market capitalisation 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, the post points out, early reactions to the Omicron variant included a significant crypto selloff.

The post also points to challenges around the identification, monitoring, and management of risks defy regulators and firms. These include, it says, 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 “cryptoisation”—when these assets replace domestic currency, and circumvent exchange restrictions and capital account management measures,” the post states.

“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 IMF says.

It argues that 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 minimising the potential for regulatory arbitrage, or moving activity to jurisdictions with easier requirements,” IMF suggests. “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,” it continues. “Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows.

It adds that, while useful, current and previous efforts of regulatory guidance aren’t sufficiently coordinated towards a global framework for managing the risks to financial and market integrity, financial stability, and consumer and investor protection.

The post suggest three key elements to the proposed global regulatory framework; the licensing and authorisation of service providers that deliver critical functions; it should be tailored to the services being offered, for example, payments or investments, and mirror regulations in those fields in the traditional finance world; and the requirements on regulated institutions concerning their exposures to and engagement with, crypto, should be clear.

“There is an urgent need for cross-border collaboration and cooperation to address the technological, legal, regulatory, and supervisory challenges, IMF says. “Setting up a comprehensive, consistent, and coordinated regulatory approach to crypto is a daunting task. But if we start now, we can achieve the policy goal of maintaining financial stability while benefiting from the benefits that the underlying technological innovations bring.”