Rapid growth and increasing adoption of crypto assets pose financial stability challenges: IMF

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The rapid growth of the crypto ecosystem presents new opportunities, the IMF said, but also warned that digital currency assets pose financial stability challenges.

Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their 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 ushers in a new era that makes payments and other financial services cheaper, faster, more accessible and allows them to cross borders quickly, ”said in a chapter of its latest Global Financial Stability Report.

Crypto asset technologies have the potential as a tool for faster and cheaper cross-border payments. Bank deposits can be turned into stablecoins that allow instant access to a wide range of financial products from digital platforms and enable instant currency conversion, the IMF said in its chapter titled The Crypto Ecosystem and the Challenges of financial stability.

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

“Despite the 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, financial adviser and director of the IMF’s Monetary and Capital Markets Department, said that Bitcoin could lead to instability because it is extremely volatile. It was trading above 65,000 roughly earlier this year and then fell below 30,000.

“It can go up, it can come down. So if you are a trader and quote in Bitcoin, you are exposed to this huge volatility. It is much more volatile than stocks or commodities or even exchange rates. It’s a very, very volatile asset, and that introduces instability, ”he said.

“It’s great as an investment asset, isn’t it. But as a monetary aggregate, it just doesn’t have the right properties, ”Adrian said.

“And let me add two more issues with that. The first is that the transaction costs can be quite expensive and compared to digital currency, like 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 been completed, it needs to be verified on all of these different computers. So it’s not that instantaneous, and it can be expensive to deal with and it’s extremely volatile. It doesn’t have the properties you want money to have, ”he said.

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

“In emerging markets, the advent of crypto assets has its advantages but can speed up cryptoization and bypass restrictions on the exchange and control of capital. The increase in crypto asset trading in these economies could lead to destabilization of capital flows, ”he said.

“Policymakers should implement global standards for crypto assets and improve their ability to monitor the crypto ecosystem by filling data gaps. As the role of stablecoins increases, regulations must match the risks they present and the economic functions they perform. Emerging markets facing crypto risks should strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies, ”the report said.

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 their efforts.

“Cryptoassets offer a whole new world of opportunities: quick and easy payments. Innovative financial services. Inclusive access to previously “unbanked” parts of the world. Everything is made possible by the crypto ecosystem, ”they wrote. “But with the opportunities come the challenges and the risks,” he added.


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