IMF, FSB Release Joint Paper On Recommendations For Crypto Policy

The International Monetary Fund (IMF) and the Financial Stability Board (FSB) have jointly released a policy paper containing recommendations for regulating crypto assets. This initiative was carried out at the request of the Indian G20 presidency, with the goal of providing guidance to various jurisdictions in addressing the risks associated with crypto asset activities.

The policy paper focuses on two key aspects of the crypto industry: stablecoins and decentralised finance (DeFi). It aims to consolidate collective recommendations and standards to help authorities create effective regulatory frameworks. It is important to note that the paper does not introduce new policies or expectations but rather offers guidance on how to regulate these aspects of the crypto market.

Stablecoins, which are designed to maintain a stable value, are a central concern addressed in the paper. The document highlights the potential risks associated with stablecoins, emphasising that they can become abruptly volatile and pose a significant threat to financial stability. This volatility can have far-reaching consequences, impacting various aspects of the financial system.

Regarding DeFi, the policy paper argues that despite its unique processes and structure, DeFi does not fundamentally differ from traditional financial systems in terms of the functions it performs. This implies that it can inherit similar risks and vulnerabilities, including liquidity mismatches, operational fragility, interconnectedness, and leverage.

The paper further notes that claims of decentralisation in the DeFi space often do not stand up to scrutiny. DeFi protocols can have governance frameworks that are unclear, opaque, untested, or susceptible to manipulation, which exposes users to risks.

Say no to blanket bans

One significant aspect of the paper is its stance on banning cryptocurrencies. The IMF and FSB reaffirm their position that an outright ban on cryptocurrencies may not be an effective solution in the long run. Instead, they suggest that authorities should focus on addressing the underlying factors driving the demand for crypto, such as the need for digital forms of payment. The paper highlights that widespread adoption of crypto assets could potentially undermine monetary policy effectiveness, lead to capital flow issues, exacerbate fiscal risks, divert resources from the real economy, and threaten global financial stability.

The joint synthesis paper is the first-ever global attempt to provide a framework for cryptocurrencies and will be presented to G20 members ahead of the Leaders' Summit scheduled for September 9 and 10. It is anticipated that the meeting will bring about a growing consensus on establishing a common regulatory framework for the crypto industry.

The paper also acknowledges the challenges posed by crypto assets in cross-border payments. The use of cryptocurrencies for international transactions can create data collection and analysis challenges, including issues related to currency substitution and cross-border usage. The paper highlights that rapid adoption of crypto assets can impact the monetary independence and financial stability of economies.

While advocating against blanket bans on crypto assets, the paper suggests that jurisdictions should implement the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing standards that apply to virtual assets and virtual asset service providers. This approach is seen as a way to address the misuse of crypto assets while avoiding the drawbacks of blanket bans.