IMF warns cryptos may destabilise financial system

Highlights

  • The IMF has raised concerns regarding the widespread adoption of cryptocurrencies.
  • It is also worried over the trend of accepting cryptocurrencies as a legal tender which could destabilise capital flows of countries.
  • It suggested policymakers establish a global standard for cryptocurrencies and enhance their ability to monitor the entire ecosystem.

In the latest edition of the Global Financial Stability report by the International Monetary Fund (IMF), it stated its concerns with respect to the widescale adoption of cryptocurrencies. It said there was a need to closely monitor the risks associate with booming crypto trading and the proliferation of digital coins.

According to the IMF, as cryptos are being adopted on a wider scale, there would be a direct impact on economies and the trend would increase potential risks. It is majorly concerned with the inadequate regulatory environment and deficiencies in the operating structure of the entire crypto space, especially concerning to crypto exchanges that quite frequently go down during a massive surge in trading volumes.

Cryptocurrencies

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“Challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto asset providers, investor protection risks for crypto assets and DeFi (decentralised finance), and inadequate reserves and disclosure for some stablecoins,” the IMF report said.  

IMF warns Cryptocurrencies may destabilise financial system

It was also worried about the trend of accepting cryptocurrencies as a legal tender, quoting an example of El Salvaror, which recently made Bitcoin a legal tender across the country. This could destabilise the capital flow of the country.

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It suggested policymakers should establish a global standard for cryptocurrencies and improve their ability to monitor the crypto ecosystem by addressing data gaps. It said that the risks to financial stability were not yet systemic, but they should be closely monitored, and emerging economies faced with cryptoisation risk should consider the benefits of issuing central bank digital currencies.

It also warned of the risk of stablecoins, which are essentially cryptocurrencies but tied to a fiat currency or any other real asset such as the US dollar, precious metals, etc. It helps to mitigate the risk of excessive volatility of these cryptos.

The largest stablecoin in the world is Tether (USDT/USD), which holds almost US$70 billion of commercial papers. The IMF is concerned that if there is a run on Tether, it could create a run on the commercial papers as well and this contagion risk could well be there for other stablecoins as well.

Read More: Can Crypto Ever Go Green?

Bottom Line

The rapid growth of the crypto ecosystem has posed some challenges to financial stability. For developing economies and emerging markets, the increased use of crypto assets presents some benefits, but macro-financial risks need to be monitored and regulated.

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