As crypto got big, the IMF fears governments are losing control of monetary policy and finance. The nation-states are to react to this with nine commandments.
The International Monetary Fund (IMF) has published a framework for how governments should deal with cryptocurrencies. This contains nine “key elements” to establish an “effective policy” that curbs the risks that cryptocurrencies pose.
Because the IMF is starting to fear cryptocurrencies. And that is almost more interesting than the concrete measures. In a press release, the institution explains that “the growing adoption of crypto-assets in some countries, the trans-territorial nature of crypto-assets and their providers, as well as the increasing entanglement with the financial system” create the need for “extensive, consistent and to respond in a coordinated manner.”
Crypto went big, and that’s startling the IMF.
As a prelude to the measures, the IMF publishes an extensive list of risks associated with the spread of crypto. It is the most comprehensive list of risks I know of. They could be summed up as concerns about a comprehensive loss of fiscal control by states.
These perceived risks cover four areas:
Monetary Policy : Crypto could threaten “the effectiveness of monetary policy”. When companies and households start investing in crypto assets that are not tied to domestic fiat currencies, the scope for monetary policy dwindles – and with it the ability of states to use the printing press to conduct economic and debt policy.
Capital Flows : Crypto assets can have “impact on the volume and volatility of capital flows”. If they make cross-border transactions cheaper, investors could move more money abroad. If this happens with “naked cryptocurrencies” – i.e. coins like bitcoin – capital flows could become more volatile. Since cryptocurrencies are generally difficult to censor, governments would also find it more difficult to control these flows, for example to prevent capital flight.
Financial Stability : Fluctuating cryptocurrency exchange rates can make the national and international monetary system more volatile. When crypto assets are widely held by individuals and financial institutions, rapid price changes can threaten financial stability. Hacks, bugs or attacks by governance tokens could also destabilize the financial system if adopted accordingly.
Fiscal Stability : In the absence of clear rules on taxation, the proliferation of crypto assets can result in fiscal penalties as tax offices do not know how to collect taxes. The pseudonymous nature of crypto assets could also encourage tax avoidance. Additionally, when a cryptocurrency becomes legal tender, as in El Salvador, exchange rate risks seep into tax revenues.
Widespread adoption of cryptocurrencies, whether tokens, real cryptocurrencies, or stablecoins, poses many challenges for governments. The IMF therefore advises them with a framework on how they should react.
The Nine Commandments
IMF directors agree that “strict bans are not the best first option.” But they concede that “targeted restrictions can take effect” as necessary. While some Directors feel that an outright ban should not be ruled out, the broad consensus is that regulation should not discourage innovation.
With the help of nine principles, governments should be able to deal with a further increasing adoption of cryptocurrencies without suffering a complete loss of control. The IMF advises to…
1. Safeguard monetary sovereignty and stability by strengthening monetary policy frameworks and do not grant crypto assets official currency or legal tender status.
2. Guard against excessive capital flow volatility and maintain effectiveness of capital flow management measures.
3. Analyze and disclose fiscal risks and adopt unambiguous tax treatment of crypto assets.
4. Establish legal certainty of crypto assets and address legal risks.
5. Develop and enforce prudential, conduct, and oversight requirements to all crypto market actors.
6. Establish a joint monitoring framework across different domestic agencies and authorities.
7. Establish international collaborative arrangements to enhance supervision and enforcement of crypto asset regulations.
8. Monitor the impact of crypto assets on the stability of the international monetary system.
9. Strengthen global cooperation to develop digital infrastructures and alternative solutions for cross-border payments and finance.
By adopting the framework, policy makers can better mitigate the risks posed by crypto assets while also harnessing the potential benefits of the technological innovation associated with it.
Interestingly, points 1.), 2.) and 9.) are not directly about crypto. Rather, cryptocurrencies are becoming an opportunity to tackle long-overdue modernizations in the financial sector.