While cryptocurrency can improve the global payments system, digital coins still pose significant challenges to market conditions worldwide, the International Monetary Fund warned in a new report on Tuesday.
In his current report on global financial stability, the fund stated that risks stemming from the booming crypto trade and the proliferation of digital coins “appear limited for the time being,” but they should be monitored closely.
As the adoption of crypto increases, the potential economic impact and risks will increase, according to the IMF. The international panel added his vote growing chorus about the need for more supervision, Underlines that crypto has inadequate regulations and flaws in its operational structure – suggesting exchanges plummeting on large sell-offs.
“The challenges of the crypto ecosystem include operational and financial integrity risks for providers of crypto assets, investor protection risks for crypto assets and DeFi [decentralized finance]and insufficient reserves and disclosure for some stablecoins, ”the IMF report reads.
On his list of worries is the increasing trading of crypto assets in emerging markets – like El Salvador, which did recently started accepting Bitcoin as legal tender – could lead to destabilizing capital flows.
Separately, the IMF warns that the risk of runs for stablecoins could also trigger an emergency sale of commercial paper. Also, as the use of stablecoin and cryptocurrencies increases, the IMF warns that doing so could harm fiscal policy by allowing tax evasion.
Stablecoins are cryptocurrencies whose values are tied to fiat currencies such as the US dollar, precious metals or short-term securities in order to reduce the inherent volatility of cryptocurrencies. They are used by traders to get in and out of stores, conduct business.
Tether (USDT-USD), the world’s largest stablecoin by market capitalization Nearly $ 70 billion worth of commercial paper. The IMF warns that a run on Tether could result in a run on commercial paper, and points out that such a risk of contagion could arise for other stablecoins in the future.
The risks suggested in the report can be further compounded by the use of leverage offered on crypto exchanges, which was 125 times the initial investment, according to the IMF.
The market capitalization of stablecoins quadrupled to more than $ 120 billion in 2021, while trading volume outperforms other crypto assets as they are used to conduct spot and derivative trades on exchanges.
Most stablecoins don’t offer transparent disclosure of what they support. While Tether has disclosed the composition of its secured assets, the IMF says those disclosures are not audited by independent auditors – and some key information is still missing, including where it lives, currencies, and the sector of its commercial paper holdings.
U.S. authorities are expected to come up with a regulation proposal for stablecoins later this month, and transparency on what exactly stablecoins supports will be part of the recommendations.
The IMF also warns that the use of stablecoins as a means of payment and a store of value could pose additional challenges by strengthening economies to bring their currencies into line with the US dollar. The problem is that this could affect the ability of central banks to conduct monetary policy and create risks to financial stability through currency mismatches on the balance sheets of banks, corporations and households.
Additionally, the IMF warned that the banking sector could come under pressure if the crypto ecosystem becomes an alternative to bank deposits or even loans.
Increased competition for bank deposits from stablecoins held on crypto exchanges or private wallets could push local banks to less stable and more expensive sources of funding to maintain similar credit growth, according to the report.
A generally unsound economic policy, combined with inefficient payment systems in some emerging and developing countries, is promoting the introduction of crypto there, according to the fund.
However, the international body is not in favor of countries adopting cryptocurrencies as the main national currency and notes that this “involves significant risks and is an inadvisable abbreviation”. That’s partly why El Salvador’s experiment with Bitcoin (BTC) is closely observed.
SECURING AGAINST RISKS
To protect against systemic risks to the global financial system, the IMF said that global standards for crypto assets – especially taxes – should be adopted and that national regulators should coordinate for effective enforcement to prevent regulatory arbitrage.
The IMF also appeared to be on the side of the chairman of the Securities and Exchanges Commission, Gary Gensler, noting in the report that when crypto exchanges trade tokens that meet the definition of securities, those tokens should be regulated as securities. The exchanges should then be required to comply with these disclosures both domestically and abroad.
For stablecoins, the international body says disclosure requirements for what stablecoins are covered should be mandated along with independent reviews of those reserves.
“Globally, as part of the G20 cross-border payments roadmap, policy makers should prioritize making cross-border payments faster, cheaper, more transparent and more inclusive,” the IMF said.
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