The International Monetary Fund (IMF) has cautioned the world of ‘cryptoization’ or crypto assets replacing domestic currencies particularly in emerging markets and developing economies with growth in crypto adoption. In a recent blog calling for a global crypto regulation to be comprehensive, consistent and coordinated, IMG noted the financial system risks and challenges from crypto assets. For instance, stretched valuations, operational and financial integrity risks from crypto asset exchanges and wallets, investor protection, and inadequate reserves and inaccurate disclosure for some stablecoins that “defy regulators and firms”.
“In emerging markets and developing economies, the advent of crypto can accelerate what we have called “cryptoization”—when these assets replace domestic currency and circumvent exchange restrictions and capital account management measures,” IMF said in the blog published last Thursday. With respect to stretched valuations, IMF referred to the early reactions to the Omicron variant that included a significant crypto selloff. Bitcoin had dropped over 20 per cent from nearly $59,000 price mark on November 26 when the World Health Organisation (WHO) declared Omicron a variant of concern to $46,700 as of Tuesday early morning, as per CoinMarketCap data.
Suggesting a global framework comprising standards for regulation of crypto assets, IMF said that crypto-asset service providers that deliver critical functions such as storage, transfer, settlement, and custody of reserves and assets should be licensed or authorized. Also, the licensing and authorization criteria should be clearly articulated.
IMF said that the requirements should be tailored to the main use cases of crypto assets and stablecoins. For instance, services and products for investments should have requirements similar to those of securities brokers and dealers, overseen by the securities regulator. Services and products for payments should have requirements similar to those of bank deposits, overseen by the central bank or the payments oversight authority.
On the authorities’ part, they should provide clear requirements on regulated financial institutions concerning their exposure to and engagement with crypto. “For example, the appropriate banking, securities, insurance, and pension regulators should stipulate the capital and liquidity requirements and limits on exposure to different types of these assets, and require investor suitability and risk assessments,” IMF said.
Importantly, as per a survey of 42 crypto experts globally published in July this year by the UK-based personal finance platform Finder, bitcoin will overtake global finance by 2050. IMF had earlier noted that attempts to make crypto assets a national currency are an “inadvisable shortcut”. The warning had come weeks after El Salvador had announced the adoption of Bitcoin as its legal tender.