- The International Monetary Fund report lists five recommendations to help regulate crypto and manage its risks.
- The report talks about operations in the crypto ecosystem and the nature of stablecoins.
- The IMF believes crypto will fair better with clear regulations and targeted restrictions.
The International Monetary Fund (IMF) has made five recommendations they believe will help regulators manage the risks associated with crypto while allowing room for innovation.
The recommendations were noted in the recently published Fintech Notes, which addressed the issue of global financial stability in terms of regulations within the crypto ecosystem. They were also posted on the official IMF website.
The reports illustrate the cycle of disruption in many parts of the crypto asset market, especially in recent times. The failure of exchanges like FTX, stablecoins like Terra LUNA, and hedge funds have also raised concerns about client protection, market practices “and where interlinkages with the core financial system are deepening, for systemic risk oversight and financial stability.”
According to the IMF, these issues can be addressed by “strengthening financial regulation in this area and developing global standards,” all of which are implementable by regulatory authorities.
Two Levels to the IMF Reports
The IMF reports addresses issues on two levels; a comprehensive approach and a narrow focus on stablecoins and their arrangements.
The comprehensive approach evaluates key entities that carry basic operations inside the sector, applying our results and recommendations to the entire crypto asset ecosystem.
The other approach studies the impact of stablecoins as a type of crypto designed to dampen price volatility through various stabilization mechanisms. However, it notes that stablecoins, in their current stage, cannot provide permanent stability.
5- Point Recommendations
The first recommendation deals with crypto asset service providers. The IMF believes these persons should be licensed, registered, and authorized. Similarly, the Securities Exchange Commission has clarified that crypto companies and providers of securities are to be written or face penalties.
Under the umbrella of crypto asset service, providers are those providing “storage, transfer, exchange, settlement, and custody services.”
Rules governing service providers in the traditional finance sector should also apply to those in the crypto industry. Also, licensing and authorization criteria should be clearly spelled out, the responsible authorities clearly designated, and coordination mechanisms among them well defined.
The second states that entities in charge of multiple functions should undergo additional “prudential” requirements.
The IMF made mention of FTX and how combining several functions- exchange, wallets, and market-making services- under one body creates more risks for investors.
As investigative reports have revealed, the former CEO of FTX, Sam Bankman-Fried, had access to FTX customer funds, which he gave to Alameda. Before that, he had repeatedly denied allegations of companies working together to procure funds. In the IMF, customer assets should be separated from other functions to avoid repeating FTX’s situation.
Thirdly, issuers of stablecoins should be held to strict prudential standards.
Stablecoins have gained more acceptance outside the crypto space than other types of cryptocurrencies, as they are pegged to the monetary instrument everyone trusts- fiat.
“They have the potential of becoming widely used payment instruments. As such, they look increasingly like “money.” If not properly regulated, stablecoins could pose serious challenges to monetary and financial stability,” the IMF report explained.
The institution proposed that strong regulations like those governing the banking sector should be imposed, and the central banks should control stablecoins activities.
Concerning regulations, the IMF recommended that requirements on regulated financial institutions be well-defined, alongside their exposure to and engagement with crypto.
One factor that has kept the crypto industry from gaining adoption or favorable entrance into economies is the lack of proper regulations and guidelines that stipulate “dos and don’ts.”
As such, regulatory entities providing custody services should clarify all requirements to resolve the risks arising from those functions.
Finally, the organization called for “robust, globally consistent, comprehensive regulatory responses” to accomplish adequate crypto supervision and regulation.
Crypto’s borderless nature has shown the ineffectiveness of national authorities in their uncoordinated approach. For the global measure to be effective, it must be responsive to a changing landscape and risk outlook.
The IMF also highlighted the benefit of targeted restrictions, where there is sufficient regulatory capacity, in producing a positive public policy outcome. For example, Japan’s advanced regulatory approach and Financial Action Task Force recommendations have restricted the use of certain crypto derivatives while opening the door for others to “thrive.”
And the restrictions of crypto promotions, as seen in Spain’s decision to impose tighter regulations on crypto advertising.
