IMF warns cryptocurrencies could threaten financial stability without regulation

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While cryptocurrency has the ability to improve the global payment system, digital coins still pose considerable challenges to market conditions around the world, the International Monetary Fund warned in a new report on Tuesday.

In its latest Global Financial Stability Report, the fund said the risks associated with the rise in crypto trading and the proliferation of digital coins appear contained for now, but they need to be watched closely.

As crypto adoption grows, the potential impact on the economy and risks will increase, according to the IMF. The international body added its voice to a growing chorus of the need for increased scrutiny, pointing out that the crypto has inadequate regulations and loopholes in its operating structure indicating that trading declines during massive sell-offs.

The challenges posed by the crypto ecosystem include operational and financial integrity risks of crypto asset providers, investor protection risks for crypto assets and DeFi [decentralized finance], and inadequate reserves and disclosure for some stable coins, according to the IMF report.

On his list of concerns, the increase in crypto asset trading in emerging markets like El Salvador, which has recently started accepting bitcoin as legal tender, could destabilize capital flows.

Currency stability

A man stands next to a sign that reads “Bitcoin accepted here”, outside a motorcycle repair shop where cryptocurrency is accepted as a form of payment, in Aguilares, El Salvador on October 6 2021. Photo taken on October 6, 2021. REUTERS / Jose Cabezas

Separately, the IMF warns of the risk of a stablecoin rush that could also trigger a discount sale of commercial paper. Additionally, as the use of stablecoins and cryptocurrencies increases, the IMF warns that it could hurt fiscal policy by allowing tax evasion.

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Stablecoins are cryptocurrencies whose values ​​are tied to fiat currencies like the US dollar, precious metals, or short-term securities in order to mitigate the inherent volatility of cryptocurrencies. They are used by traders to enter and exit transactions, settle transactions.

Tether (USDT-USD), the world’s largest stable coin by market cap, holds nearly $ 70 billion in commercial paper. The IMF warns that if there is a rush on Tether, it could create a rush on commercial paper, noting that such contagion risk could occur for other stablecoins in the future.

The report suggests that the risks can be further magnified by using the leverage offered in crypto exchanges, which has been up to 125 times the initial investment, according to the IMF.

The market capitalization of stablecoins quadrupled in 2021 to over $ 120 billion as trading volumes exceed other crypto assets as they are used to settle spot and derivative trades on exchanges.

Most stablecoins don’t offer transparent disclosure of what supports them. While Tether disclosed the composition of its guaranteed assets, the IMF says these disclosures are not audited by independent accountants and that some important information is still missing, including domicile, denomination of currencies and sector of commercial paper holdings. .

U.S. officials are expected to launch a regulatory proposal for stablecoins later this month, and requiring transparency as to what exactly supports stablecoins should be part of the recommendations.

The IMF also warns that using stablecoins as a means of payment and a store of value could pose more challenges, strengthening economies to align their currencies with the US dollar. The problem is that this could undermine the ability of central banks to formulate monetary policy and pose risks to financial stability due to currency mismatches in the balance sheets of banks, businesses and households.

Additionally, the IMF has warned that the banking sector could come under pressure if the crypto ecosystem becomes an alternative to bank deposits or even loans.

Stronger competition for bank deposits via stablecoins held on crypto exchanges or private wallets could push local banks to less stable and more expensive sources of funding to maintain similar levels of loan growth, according to the report.

Generally ill-advised economic policies, combined with inefficient payment systems in some emerging markets and developing economies, are driving crypto adoption there, the fund said.

However, the international body is not in favor of countries adopting cryptocurrencies as the main national currency, noting that they carry significant risks and are an inadvisable shortcut. This is partly why El Salvador’s experience with bitcoin (BTC) is being closely watched.

KEEP THE RISKS

Some of the coins of Bitcoin enthusiast Mike Caldwell are pictured in his office in this photo illustration in Sandy, Utah on January 31, 2014. REUTERS / Jim Urquhart REUTERS / Jim Urquhart (USA – Tags : BUSINESS)

To guard against systemic risks to the global financial system, the IMF said global standards for crypto assets should be adopted especially for taxes and that national regulators should coordinate for effective enforcement to prevent the regulatory arbitration.

The IMF also appeared to side with Securities and Exchanges Commission Chairman Gary Gensler, noting in the report that if crypto exchanges deal with tokens that meet the definition of securities, then those tokens should be regulated as securities. Stock exchanges should then be required to respect these disclosures, both nationally and internationally.

For stablecoins, the international body says disclosure requirements on the coins on which stablecoins are based should be mandatory, along with independent audits of those reserves.

Globally, policymakers should prioritize faster, cheaper, more transparent and inclusive cross-border payments through the G20 roadmap on cross-border payments, the IMF said.

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For more information on cryptocurrency, see:

What is Dogecoin? How to buy it

Ethereum: What is it and how do you invest in it?

The 21 best crypto leaders to watch in the second half of 2021

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