The boom in cryptocurrencies poses new challenges to financial stability and could even reduce the ability of central banks to effectively implement monetary policy, according to the International Monetary Fund (IMF).
The IMF says the many benefits of crypto assets include quick and easy payments, innovative financial services and inclusive access to previously “unbanked” parts of the world. But along with the opportunities come challenges and risks.
According to the IMF, the total market value of all the crypto assets surpassed US$2 trillion as of September 2021 – a 10-fold increase since early 2020. An entire ecosystem is flourishing, replete with exchanges, wallets, miners, and stablecoin issuers.
But the IMF notes many of these entities lack strong operational, governance, and risk practices. Crypto exchanges, for instance, have faced significant disruptions during periods of market turbulence. And, there have been several high-profile cases of hacking-related thefts of customer funds.
“So far, these incidents have not had a significant impact on financial stability. However, as crypto assets become more mainstream, their importance in terms of potential implications for the wider economy is set to increase.”
The IMF says the limited or inadequate disclosure and oversight around crypto create many risks for consumers. For example, more than 16,000 tokens have been listed in various exchanges and around 9,000 exist today, while the rest have disappeared in some form. Many of them 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 (pseudo) anonymity of crypto assets also creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing,” the IMF warns.
“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 IMF notes that most transactions on crypto exchanges happen through entities that operate primarily in offshore financial centres. “This makes supervision and enforcement not only challenging, but nearly impossible without international collaboration.”
Stablecoins, which aim to peg their value usually against the US dollar, are also growing at lightning speed, with their supply climbing four-fold throughout 2021 to reach $120 billion.
“The term 'stablecoin', however, captures a very diverse group of crypto assets and can be misleading,” the IMF observes. “Given the composition of their reserves, some stablecoins could be subject to runs, with knock-on effects to the financial system.”
The IMF notes that crypto adoption in some emerging markets and developing economies has outpaced that of advanced economies.