Crypto boom poses new challenge to financial stability–report

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Crypto boom poses new challenge to financial stability–report
Crypto boom poses new challenge to financial stability–report

Africa-PressEritrea. Crypto assets offer a new world of opportunities but pose substantial risks and challenges to financial stability, a new report has shown.

The total market value of all the crypto assets(cryptocurrency) surpassed $2 trillion as of September 2021, a ten-fold increase since early 2020.

Cryptocurrencies are digital assets or digital currencies which are built on the Blockchain tech and are cryptographically secured.

Blockchain is an open, distributed ledger technology that enables movement of digital assets from one party to another party without the need of a central party or middlemen.

It enables peer to peer transactions not monitored by any regulator.

According to the IMF’s latest Global Financial Stability Report, the entire crypto ecosystem is flourishing, replete with exchanges, wallets, miners, and stable issuers.

The report however notes that despite the growth,most of the cryptocurrency these entities lack strong operational, governance, and risk practices.

“Crypto exchanges, for instance, have faced significant disruptions during periods of market turbulence. There are also several high-profile cases of hacking-related thefts of customer funds,” the report highlighted.

IMF noted that so far these incidents have not had a significant impact on financial stability but as the crypto assets become more mainstream their importance in terms of potential implications for the wider economy is set to increase.

Another risk noted to remain substantial was consumer protection, given limited or inadequate disclosure and oversight in the sector.

The report notes that since crypto trading started more than 16,000 tokens were listed in various exchanges , today around 9000 exist , while the rest have disappeared in some form.

“This means many of the tokens have no volumes or the developers have walked away from the project. Some were likely created solely for speculation purposes or even outright fraud,” the report notes.

Another risk noted was that the anonymity of crypto assets creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing.

“Although authorities may be able to trace illicit transactions, they may not be able to identify the parties to such transactions. Additionally, the crypto ecosystem falls under different regulatory frameworks in different countries, making coordination more challenging,” the report noted.

Most transactions on crypto exchanges happen through entities that operate primarily in offshore financial centers.

This makes supervision and enforcement not only challenging but nearly impossible without international collaboration.

Significant challenges ahead

Although the extent of the adoption of crypto assets is difficult to measure, surveys and other measures suggest that emerging markets and developing economies such as Kenya may be leading the way.

Most notably, residents in these countries increased their trading volumes in crypto exchanges sharply in 2021, the report notes.

“Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarization forces in the economy,or in this case cryptoization, where residents start using crypto assets instead of the local currency,” said the report.

This in turn can reduce the ability of central banks to effectively implement monetary policy.

It could also create financial stability risks, for example through funding and solvency risks arising from currency mismatches, as well as amplify the importance of some of the previously mentioned risks to consumer protection and financial integrity.

Another challenge is that threats to fiscal policy could intensify, given the potential for crypto assets to facilitate tax evasion.

“Increased demand for crypto assets could also facilitate capital outflows that impact the foreign exchange market, the report notes.

Policy action

IMF recommended various policies and actions which can ensure the crypto market maintains financial stability.

The first recommendation was for regulators and supervisors to be able to monitor rapid developments in the crypto ecosystem and the risks they create by swiftly tackling data gaps.

“The global nature of crypto assets means that policymakers should enhance cross-border coordination to minimize the risks of regulatory arbitrage and ensure effective supervision and enforcement

IMF also called on the national regulators to prioritize the implementation of existing global standards.

Standards focused on crypto assets are currently mostly limited to money laundering and proposals on bank exposures.

IMF however noted that other international standards, in areas such as securities regulation, as well as payments, clearing and settlements may also be applicable and need attention.

The final recommendation was for authorities to prioritize strengthening macroeconomic policies and consider the benefits of issuing central bank digital currencies and improving payment systems.

“Central bank digital currencies may help reduce cryptoization pressures if they help satisfy a need for better payment technologies.”

Globally, policymakers should prioritize making cross-border payments faster, cheaper, more transparent and inclusive through the G20 Cross Border Payments Roadmap, IMF said.

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