The surge in the public adoption of crypto assets has led to the need for better public and regulatory policies and, according to the IMF, requires a concerted and coordinated regulatory response in order to address the tangible risks posed by the sector to economies and to consumers.  

A recently-published IMF paper puts forward a framework that will underpin future rules and regulations for crypto assets and intends to help shape the global dialogue on the subject of crypto more generally.

Tailor the pace

When introducing the framework the IMF emphasizes that coordination and consistent implementation is critical in order to help forestall regulatory arbitrage. And while the pace of implementation needs to be tailored to countries’ specific circumstances, regulatory inaction is “untenable as crypto assets may continue to evolve despite the current downturn”. IMF chief Kristalina Georgieva emphasized this message in a recent Bloomberg interview stating that regulating the world of digital money remains a top priority for the FSB, IMF and BiS.

The IMF recommends that crypto assets should not be granted official currency or legal tender status because this might have a detrimental impact on monetary sovereignty, pose a threat to financial stability and more generally amplify risk.

The framework classifies crypto assets into three distinct categories reflecting their key features:

• unbacked tokens;
• stablecoins; and
• other tokens (utility and security).

Its key recommendations emphasize the need for rules and standards that distinguish between distinct activities (for example trading and storage) and cover:

• governance and risk management;
• asset segregation;
• transparency and disclosure; and
• independent audit.

Most importantly, the proposed framework attempts to address the potential risks associated with a more widespread adoption of crypto assets. The risks that the IMF is specifically concerned about are economic and financial stability, market and financial integrity and also consumer protection. The focus on consumer protection is dictated not only by recent market events (such as the collapse of FTX), but also by specific concerns from emerging markets and developing economies where consumers risking their own assets can translate more quickly into financial stability problems.

Effective regulation

The IMF is focused on helping develop effective and consistent regulation and considers a comprehensive regulatory response a preferred option. It does not consider outright bans on crypto assets a preferred or “first-best option” for addressing the risks posed by the sector, particularly because they can stifle innovation, may prove difficult to enforce and, potentially, simply result in the illicit activities being driven “underground”.

Despite this, the paper is careful to point to internal dissent on the subject, with at least a few of its directors believing that bans should not be ruled out. This is also something that Georgieva called out in her interview suggesting that bans “should not be taken off the table” because countries may need it as a “tool of last resort” in order to “protect their people and to protect their financial stability on which growth depends”.

Finally, the IMF paper questions the purported benefits of crypto assets and makes clear that its proposed framework cannot fix the underlying crypto “design flaws” including “the lack of a credible nominal anchor, payments finality or scalability”.