A joint policy document on the cryptocurrency market, authored by the International Monetary Fund (IMF) and the Financial Stability Board (FSB), has cautioned against the ineffectiveness of outright bans on cryptocurrencies. Instead, the paper advocates for targeted regulatory measures and prudent monetary policies to mitigate the associated risks. The report also highlights the heightened volatility and potential financial stability risks posed by global stablecoins compared to other forms of cryptocurrencies.
The joint policy roadmap, commissioned by the G20 and led by India, consolidates the guidelines of international standard-setting organizations, such as the FSB and the IMF, into a single comprehensive report. It emphasizes the necessity of comprehensive regulatory and supervisory frameworks for crypto-assets to safeguard macroeconomic and financial stability.
The synthesis paper from the IMF and FSB is scheduled for presentation to the G20, marking a significant effort by international bodies to establish global standards for the cryptocurrency industry, spurred by the numerous collapses of crypto enterprises in 2022.
To address macroeconomic risks stemming from cryptocurrencies, the report advises jurisdictions to enhance their monetary policy frameworks, guard against excessive capital flow volatility, and establish clear tax treatment for cryptocurrencies. The report reaffirms the IMF’s stance that outright bans on cryptocurrencies may not effectively mitigate associated risks. Instead, targeted restrictions are suggested as a more practical approach, particularly for emerging economies.
Countries like India have expressed concerns about the potential threats posed by widespread crypto adoption to their monetary policies and have called upon international policy bodies to recommend stronger prohibitions or address these specific concerns.
The report cautions against imposing blanket bans that criminalize all cryptocurrency activities, including trading and mining, within a jurisdiction. Such bans are not only costly and technically challenging to implement but may also result in crypto activities relocating to other jurisdictions, thereby creating spillover risks. The report underscores that restrictions should not replace robust macroeconomic policies, credible institutional frameworks, and comprehensive regulation and oversight, which are the primary defense against the macroeconomic and financial risks associated with crypto-assets.
Nevertheless, the report suggests that not all prohibitions should be ruled out entirely. The IMF and FSB propose that jurisdictions may consider implementing targeted and temporary restrictions to manage specific risk factors during times of stress or while working on better internal solutions. The report cites examples of such restrictions, including measures against privacy-focused “privacy” coins in places like Dubai and bans on Nigerian banks serving crypto firms.
The report also addresses concerns raised by G20 countries regarding the proliferation of stablecoins, which are cryptocurrencies designed to maintain a stable value pegged to other assets or currencies. It acknowledges that the widespread use of foreign currency-denominated stablecoins could potentially lead to rapid capital flight, endangering foreign currency bank accounts and even triggering bank runs in emerging economies. The report notes that while stablecoins facilitate various transactions, they carry unique risks associated with maintaining a stable value and dependence on private issuers, as exemplified by the 2022 de-pegging of the algorithmic stablecoin terraUSD from the U.S. dollar, resulting in significant market losses.
In conclusion, the IMF-FSB joint policy document emphasizes the limitations of blanket cryptocurrency bans and encourages targeted regulatory measures and prudent monetary policies to manage the risks associated with the crypto market, particularly in emerging economies. Additionally, it highlights the specific risks posed by global stablecoins and the potential for abrupt volatility in these stablecoin systems.