Crypto assets pose financial stability challenges: IMF report

PTI Updated - October 02, 2021 at 09:39 AM.

But have potential in cross-border payments and instant currency conversion

Representations of Bitcoin and other cryptocurrencies on a screen showing binary codes are seen through a magnifying glass in this illustration picture taken September 27, 2021. REUTERS/Florence Lo/Illustration

The rapid growth of the crypto ecosystem presents new opportunities, the IMF has said, but also cautioned that the digital currency assets pose financial stability challenges. Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of units and verify the transfer of funds, operating independently of a central bank.

“The rapid growth of the crypto ecosystem presents new opportunities. Technological innovation is ushering in a new era that makes payments and other financial services cheaper, faster, more accessible, and allows them to flow across borders swiftly,” it said in a chapter of its latest report Global Financial Stability Report.

Innovative financial services

Crypto asset technologies have potential as a tool for faster and cheaper cross-border payments. Bank deposits can be transformed to stable coins that allow instant access to a vast array of financial products from digital platforms and allow instant currency conversion, said the IMF in its chapter titled The Crypto Ecosystem and Financial Stability Challenges.

Decentralised finance could become a platform for more innovative, inclusive, and transparent financial services, it added.

Volatile currency

“Despite potential gains, the rapid growth and increasing adoption of crypto assets also pose financial stability challenges,” the IMF said.

In a recent interview with PTI, Tobias Adrian, the Financial Counsellor and Director of the Monetary and Capital Markets Department of IMF, said that Bitcoin could lead to instability because it is extremely volatile. It was trading above 65,000 earlier this year, and then it came down to below 30,000.

“It might go back up, it might go back down. So if you're a merchant, and you're quoting in Bitcoin, you're exposed to this massive volatility. It is much more volatile than equities or commodities or even exchange rates. It's a very, very volatile asset, and that is introducing instability,” he said.

“It's fine as an investment asset. But as a monetary aggregate, it just doesn't have the right properties,” he added.

Also see: Indian cryptocurrency market likely to reach up to $241 million by 2030: Nasscom

“And let me just add two more problems with that. One is that transaction costs can be fairly expensive and compared to digital money, as it's the case in India for example, where you have a real-time gross settlement payment system, it’s actually slow because it's a distributed ledger, and to know that the transaction has gone through, it has to be verified on all of these different computers. So, it's not that instantaneous, and it can be expensive to transact and it's extremely volatile. It doesn't have the properties that you want money to have,” Adrian said.

Destabilise capital flows

The IMF in its report said that challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto asset providers, investor protection risks for crypto-assets and DeFi, and inadequate reserves and disclosure for some stable coins.

“In emerging markets, the advent of crypto assets has benefits but can accelerate cryptoisation and circumvent exchange and capital control restrictions. Increased trading of crypto-assets in these economies could destabilise capital flows,” it said.

Need for regulation

“Policymakers should implement global standards for crypto-assets and enhance their ability to monitor the crypto ecosystem by addressing data gaps. As the role of stable coins grows, regulations should correspond to the risks they pose and the economic functions they perform. Emerging markets faced with cryptoisation risks should strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies,” the report said.

Also see: China declares all cryptocurrency transactions illegal

In a joint blog post, three IMF officials Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou wrote that as crypto assets take hold, regulators need to step up.

“Crypto-assets offer a new world of opportunities: Quick and easy payments. Innovative financial services. Inclusive access to previously “unbanked” parts of the world. All are made possible by the crypto ecosystem,” they wrote. “But along with the opportunities come challenges and risks,” it added.

Published on October 2, 2021 03:53