International Monetary Fund (IMF) says Crypto assets may displace local currencies in developing countries.
Gatekeepers News reports that the IMF has said crypto assets will likely substitute the currency of some emerging markets and developing economies.
This was disclosed in an IMF report titled, ‘Global Crypto Regulation Should be Comprehensive, Consistent, and Coordinated’ which was released on Thursday.
The Washington DC-based fund in the report said its mandate is to safeguard the stability of the international monetary and financial system.
The IMF said, “Some emerging markets and developing economies face more immediate and acute risks of currency substitution through crypto assets, the so-called cryptoisation.
“Capital flow management measures will need to be fine-tuned in the face of cryptoisation. 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.”
The IMF noted that the crypto assets will soon pose systemic financial stability in some countries as policymakers struggle to monitor risks, adding that crypto assets are drastically changing the financial system it is trying to protect.
The IMF wrote, “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 significant economic value of the underlying technological innovations such as the blockchain, it might also reflect froth in an environment of stretched valuations.”
The international fund body stressed that identifying, monitoring, and management of crypto-related risks continues to defy regulators and firms.
The IMF added that in developing economies, for instance, cryptoisation was threatening to replace domestic currency, and circumvent exchange restrictions and capital account management measures.
It stated that “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 said crypto’s cross-sector and cross-border remit limits the effectiveness of national approaches, adding that “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. Uncoordinated regulatory measures may facilitate potentially destabilising capital flows.”
It noted that there is a need for a global regulatory framework that provides a level playing ground along the activity and risk spectrum.
The IMF said crypto-asset service providers that deliver critical functions should be licensed or authorised.
It further wrote, “These would include storage, transfer, settlement, and custody of reserves and assets, among others, similar to existing rules for financial service providers.
“Licensing and authorisation criteria should be clearly articulated, the responsible authorities clearly designated, and coordination mechanisms among them well defined. Requirements should be tailored to the main use cases of crypto assets and stablecoins.”
The IMF added there was an urgent need for cross-border collaboration and cooperation to address technological, legal, regulatory, and supervisory challenges.
The international fund body added, “Crypto assets are potentially changing the international monetary and financial system in profound ways.”
