IMF urges global regulators to form consensus on definition, role of crypto-assets

26 April 2018 2:21pm

By Tsering Namgyal. 19 April 2018.

International standard-setters need to work together to form a clear consensus on the definition of crypto-assets and their potential role in the financial system, according to the International Monetary Fund.

The multilateral development bank urged policymakers to pursue a “nimble, innovative and cooperative approach” to digital assets epitomized by Bitcoin and Ethereum.

So far, different national jurisdictions have followed varying approaches to regulating crypto-assets, the IMF said in its 2018 Global Financial Stability Report released on Wednesday.

Given the risks of regulatory arbitrage, international regulators need to work together to draw out common best practices and effective regulatory approaches to crypto-assets.

“National authorities and international standard setters are encouraged to intensify cooperation on the monitoring of crypto-assets and on the consistency of the regulatory approach,” the report said.

The Washington, DC-based body is willing to offer itself as a catalyst and a platform for cross-border discussions aimed at harmonizing the patchwork of rules on cryptocurrencies introduced by national regulators thus far, it said.

“The IMF can help advance the agenda on regulation of crypto-assets by offering advice and by serving as a forum for discussion and international collaboration,” it said.

While the size of the crypto-market currently is not big enough to pose any risks to financial stability, this could change in the future as the sector gains critical mass.

“The dramatic growth in the sector, however, may pose risks to financial stability in the future and thus warrants vigilance by regulators,” the report warned.

Global regulators are urged to take immediate action in several areas including better monitoring of how crypto-currency markets are linked to the mainstream financial system.

The report recommends putting into place better risk management systems so that the regulators can respond in a timely manner to protect investors and consumers in the event of crises.

It also suggests setting up best practices for initial coin offerings, or ICOs, and the crypto-exchanges on which they are traded.

The international body said that it is too early to know whether the digital assets running on algorithms can become an asset class of their own, or to determine the extent to which they could change the modus operandi of mainstream banking. Many of these digital currencies might simply vanish, just as some technology companies did during the early days of the Internet boom.

Crypto-assets such as Bitcoin do seem to have the potential to make payments more effective, for instance, but there is the nagging issue of trust, as evidenced by many instances of security failures and theft.

“Before they can transform financial activity in a meaningful and lasting manner, crypto-assets will first need to earn the confidence and support of consumers and financial authorities,” the IMF said.

International standard-setters need to agree on the definition of crypto-assets — for example, whether they are a security or a currency — and what role they can fulfill in the larger financial system.

Given the anonymity they afford investors, global securities regulators have flagged money-laundering and terrorist-financing risks associated with more than 1,000 of these borderless digital tokens issued by blockchain startups, the report said.

Crypto-assets should, therefore, be subject to the same anti-money laundering and terrorist-financing rules as standard cash, including customer due diligence and transaction monitoring.

IMF Managing Director Christine Lagarde called for an “even-handed approach” to regulating crypto-assets in a blog post published on Monday, in which she summarized the gist of the group’s widely-followed annual report on global finance that devoted a section to crypto-assets.

In the blog, Lagarde called for international regulatory cooperation and stressed the need to “distinguish between real threats and needless fears” so that regulators could push for a more balanced approach to crypto-assets.

Fintech Regulation in 2018