A recent joint policy paper on cryptocurrency, authored by the International Monetary Fund (IMF) and the Financial Stability Board (FSB), cautions against implementing blanket bans to address the risks associated with the crypto sector. Instead, the paper recommends targeted restrictions and the implementation of sound monetary policies to effectively manage the challenges posed by cryptocurrencies.
The paper particularly highlights the potential risks posed by global stablecoins, which are designed to maintain a stable value. It suggests that these stablecoins may become unexpectedly volatile, presenting a more significant threat to financial stability compared to other forms of cryptocurrency.
The policy paper was commissioned by the G20 under India’s leadership and consolidates the guidelines provided by various international standard-setting bodies for the crypto industry. It emphasizes that comprehensive regulatory and supervisory oversight of crypto-assets should be the foundation for addressing macroeconomic and financial stability risks.
The report is expected to be presented to the G20, marking a significant step in establishing global norms for the cryptocurrency industry, especially in light of the multiple collapses of crypto enterprises in 2022.
To address macroeconomic risks associated with cryptocurrencies, the report recommends that jurisdictions should:
- Strengthen monetary policy frameworks.
- Guard against excessive capital flow volatility.
- Adopt clear and unambiguous tax treatment for cryptocurrencies.
The paper reiterates the IMF’s stance that outright bans on cryptocurrencies may not effectively mitigate the associated risks, especially emphasizing that targeted restrictions could be more beneficial, particularly for emerging economies.
Some emerging economies, like India, have expressed concerns about the heightened threat posed by widespread cryptocurrency adoption to their monetary policies. These countries have called for stronger prohibitions or regulatory measures to address these specific concerns.
The report argues against imposing blanket bans, as they can be costly, technically challenging, and could lead to crypto-related activities relocating to other jurisdictions, creating spillover risks. It emphasizes that restrictions should complement robust macroeconomic policies, credible institutional frameworks, comprehensive regulation, and oversight.
However, the paper does not dismiss all prohibitions outright. It suggests that jurisdictions might consider targeted and temporary restrictions during times of stress or while seeking better internal solutions to manage specific risk factors. Examples of such restrictions include regulations on privacy coins in Dubai and bans on Nigerian banks serving crypto firms.
The report also addresses the proliferation of stablecoins, a concern raised by G20 countries. Stablecoins are cryptocurrencies pegged to the value of other assets or currencies and have the potential to threaten currency replacement or bank runs in emerging economies. The paper warns that rapid capital flight could occur if foreign currency-denominated stablecoins become more attractive than traditional foreign currency bank accounts.
While stablecoins can facilitate various transactions, they also come with distinct risks, such as maintaining a stable value and dependency on private issuers. The paper highlights the real-world example of the algorithmic stablecoin terraUSD de-pegging from the U.S. dollar in 2022, causing significant market disruptions.
In conclusion, the joint IMF and FSB policy paper underscores the need for a nuanced approach to regulating cryptocurrencies. It discourages blanket bans and encourages jurisdictions to adopt targeted measures and sound monetary policies to manage the complex risks associated with the crypto sector. The paper also addresses concerns about stablecoins and their potential impact on financial stability.