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IMF calls for level-playing field in global regulatory framework for crypto assets

The framework is proposed at a time when countries like India are pondering over how crypto can be regulated.

“Crypto-asset service providers that deliver critical functions should be licensed or authorized,” the International Monetary Fund’s (IMF) said in a blog post. It suggested that a global regulatory framework for crypto assets should “provide a level-playing field across the activity and risk spectrum.” The activities referred to include storage, transfer, settlement, and custody of crypto reserves and assets, among others.

The IMF-proposed framework batted for the rules to be similar to existing rules for traditional financial service providers. Moreover, it called for the licensing and authorisation criteria to be articulated unambiguously coupled with a clear designation of responsible authorities and well-defined coordination mechanisms.

Why such a framework matters: Crypto assets have grown rapidly in the last few years with total market capitalisation nearing $2.5 trillion. Countries are waking up to its growing influence and its cross-sector and cross-border remit limits the effectiveness of national regulatory approaches.

What does the IMF recommend in its global framework?

The IMF acknowledged the economic value of the underlying technology (blockchain) powering crypto assets but it also wrote that crypto might be “froth in an environment of stretched valuations”. Here are some of the measures policymakers should keep in mind:

  • Requirements: Legislators should look to tailor requirements focusing on the main use cases of crypto assets and stablecoins, as per IMF. The economic body advised that all regulatory authorities must coordinate to address risks arising from evolving use cases of crypto. It advocated for the following:
    • Crypto products for investments should have requirements similar to those of securities brokers and dealers, managed by the securities regulator.
    • Conversely, crypto services for payments should have requirements similar to those of bank deposits, overseen by the central bank or the payments oversight authority.
  • Checks and balances for capital: The IMF called for the stipulation of capital and liquidity requirements, and limits on exposure to crypto assets by banking, securities, insurance, and pension regulators. These organisations should also be asked to carry out investor suitability and risk assessments, as per IMF.
  • Caution against cryptoization: “Capital flow management measures will need to be fine-tuned in the face of cryptoization,” the blog post read, reasoning that established regulatory tools to manage capital flows may find it difficult when value is transmitted through new instruments and services providers.
  • Cross-border collaboration: There is a need for cooperation among countries to address the technological, legal, regulatory, and supervisory challenges given the lack of jurisdiction for cryptocurrencies, IMF said.

What are the risks arising out of crypto assets?

There are operational and financial integrity risks from crypto asset exchanges and wallets, investor protection, and inadequate reserves and inaccurate disclosure for some stablecoins, the IMF said.

Cryptoization is another risk when crypto assets replace domestic currency, circumventing exchange restrictions and capital account management measures. The IMF believed that emerging markets and developing economies are susceptible to such a scenario.

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The economic body wrote that many crypto service providers operate across borders, making the task for supervision and enforcement more difficult.

“Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows,” the IMF asserted in its blog post.

IMF’s views on crypto assets in the past

“When it comes to adopting crypto assets as national currencies, the risks and costs outweigh potential benefits,” the IMF previously wrote. Here are some of the highlights from IMF’s earlier post on cryptocurrencies:

Macroeconomic stability: IMF said that households and businesses will waste time and resources choosing which money to hold as opposed to engaging in productive activities if countries were to introduce crypto as national currencies. It added that government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto asset while expenditures remained in the local currency or vice versa.

Monetary Policy: The IMF said that widespread crypto asset adoption will prevent central banks from setting their interest rates. It explained that central banks cannot set interest rates on a foreign currency.

“When a country adopts a foreign currency as its own, it “imports” the credibility of the foreign monetary policy and hopes to bring its economy–and interest rates–in line with the foreign business cycle,” the post read.

It warned that domestic consumer prices could become highly unstable and put consumers at risk. Many personal and business entities could lose wealth through large swings in value, fraud, or cyber attacks.

Environmental degradation: The IMF also said that mining cryptocurrencies such as Bitcoin guzzle enormous amounts of electricity to power computer networks that verify transactions. “The ecological implications of adopting these cryptoassets as a national currency could be dire,” it added.

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