The International Monetary Fund (IMF) has issued a warning about the potential risk cryptocurrency can pose to the global financial system. In a recent blog post two IMF officials, Bo Li and Nobuyasu Sugimoto, emphasized the increasing intertwining of traditional and crypto markets. Li and Sugimoto point out that price volatility in the crypto market due to collapsing crypto companies could harm the entire global market, according to IMF officials:
In times of stress, we have seen market failures from stablecoins, crypto-focused hedge funds, and crypto exchanges, which in turn raised serious concerns about market integrity and user protection. And with growing and deeper ties to the core financial system, concerns about systemic risk and financial stability may also arise in the near future.
Better regulation is needed
This may all look very negative, but the two IMF staff say many of these concerns can be addressed by strengthening financial regulation and oversight and by developing global legislation that can be consistently implemented by national regulators.
Stablecoins in particular are seen by the IMF as a major problem. This is because they can cause countries with a weaker currency to lose their monetary sovereignty. This, according to the officials, could pose a threat to a country’s financial stability. In addition to regulation, an important solution to prevent this is to improve traditional currencies and banking systems.
5 pillars to contain the risk of crypto
The International Monetary Fund (IMF) has outlined five key points for global regulators to consider in order to contain the risks posed by the cryptocurrency market.
First, providers of crypto asset services must be licensed, registered and authorized, with rules similar to those for traditional providers in the financial industry.
Second, entities performing multiple functions should be subject to additional prudential requirements and should not do so if conflicts of interest arise.
Third, stablecoin issuers must be subject to strict requirements to avoid undermining monetary and financial stability.
Fourth, there should be clear requirements for regulated financial institutions regarding their exposure to and involvement in crypto assets.
Finally, the IMF is calling for a robust, comprehensive and globally consistent approach to crypto regulation and supervision, as the cross-sector and cross-border nature of crypto limits the effectiveness of uncoordinated national approaches.