The IMF warns of the financial instability that crypto might lead to, here are three of their key concerns!
With the crypto market hitting US$3 trillion as of November 2021, it is almost impossible not to believe that we are amid a crypto boom. While investors and miners might be excited about the rising interest in crypto, there are some who do not see this as a positive step.
The International Monetary Fund (IMF) has been raising the alarm about cryptocurrency. Their concern stems from the fact that despite still being at a nascent stage, the crypto market has been growing alarmingly, and the regulatory efforts have not caught up to it.
Let’s dissect each of their concerns in detail to understand what the next step in crypto-regulation should look like.
Crypto as a national currency is not the right step
In 2021, El Salvador adopted Bitcoin as its legal tender. The country’s key reason behind doing so was to reduce the transaction costs of remittances, which are a large part of its gross domestic product. However, the IMF says that the risks of adopting crypto as legal tender outweigh the positives. They suggest that households and businesses have little to no incentive to save money in crypto assets, since their value is volatile and unrelated to the real economy.
Another struggle that countries would have to deal with would be the highly unstable prices of goods. Unlike fiat currencies, there are no fixed interest rates for buying or selling cryptocurrencies, given their constantly fluctuating prices. It is because crypto assets aren’t owned by a single country, and a country cannot set interest rates on a foreign currency even if they adopt it as their national tender. As a result, prices of goods would then fluctuate along with crypto prices.
The ironic “instability” of stablecoins
The IMF identifies stablecoins as a potential threat to the stability of global financial systems. Stablecoins refer to cryptocurrencies that maintain a relatively stable value by keeping reserves of the asset (like USD) to back the stablecoin. The IMF suggests that there is a need for a substantial upgrade in the disclosure standards for stablecoin issuers. They also believe that stablecoin issuers should be regulated to the same extent as other entities that provide similar services (like bank deposits or money market funds).
The organization also expressed concern about the volatility or instability of some reserve assets (e.g. crypto) that are backing some stablecoins. They mention how some stablecoins could be subject to runs due to the composition of their reserves. Runs refer to a situation where investors flock to the issuer to redeem their deposits (or, in the case of stablecoins, to redeem the stablecoin’s underlying asset value). These runs could be driven by worry over the quality of the underlying asset or the speed at which underlying assets can be liquidated.
The threat of anonymity
Another threat that has been heavily discussed in respect to cryptocurrency is that of people using the guise of (pseudo) anonymity to finance terrorist activities. The IMF says that even though crypto transactions can be traced back to digital addresses, it is a challenge to find the people making said transactions. One person can own several addresses without any personal information linking them together.
Moreover, the systems regulating cryptocurrencies change depending upon which country you are in. This makes it difficult to coordinate efforts to supervise or enforce any regulation.
The IMF’s concerns show us that there is a need for crypto regulations and their enforcement across countries. These concerns also tell us that there are negative aspects of crypto adoption and investments that we must keep in mind when pouring our money into the crypto market.
Header image courtesy of Freepik
