IMF and FSB Joint Paper Highlights Ineffectiveness of Blanket Crypto Bans

A collaborative policy document released by the IMF and FSB cautions against the adoption of sweeping prohibitions to address the risks linked to the crypto sector. Instead, it advocates for the implementation of precise regulatory measures and prudent monetary policies as preferable alternatives.
The paper suggests that global stablecoins, originally designed to maintain a stable value, may unexpectedly experience volatility, potentially presenting a more significant threat to financial stability compared to other cryptocurrencies.

Merely prohibiting cryptocurrencies will not eradicate their associated risks, as emphasized in a collaborative policy roadmap released by international regulatory authorities on Thursday.

The policy paper, initiated by India's leadership within the intergovernmental forum G20, consolidates the standards established by entities such as the Financial Stability Board (FSB), the International Monetary Fund (IMF), and various other international regulatory bodies pertaining to the cryptocurrency sector. The paper concludes that “comprehensive regulatory and supervisory oversight of crypto-assets should be a baseline to address macroeconomic and financial stability risks.”

The IMF-FSB synthesis paper is scheduled to be presented to the G20 this weekend and represents one of several initiatives undertaken by international organizations to establish worldwide standards for the industry. This initiative gains even more significance in light of the multiple cryptocurrency enterprise failures that occurred in 2022.

To address macroeconomic risks associated with cryptocurrencies, the report recommends that jurisdictions should “strengthen monetary policy frameworks, guard against excessive capital flow volatility and adopt unambiguous tax treatment of crypto.”

Thursday's report restated the IMF's position that implementing a comprehensive ban on cryptocurrencies may not effectively address the associated risks. Instead, the report suggested that tailored restrictions could be more beneficial, especially for emerging economies.

Nations such as India have expressed apprehensions regarding the heightened risk posed by the widespread adoption of cryptocurrencies to the monetary policies of developing economies. Consequently, they have urged international policy organizations to advocate for more robust regulatory measures or to actively address these unique concerns.

Targeted restrictions

Enforcing sweeping prohibitions that categorize all crypto-related actions - encompassing trading and mining - as unlawful within a single jurisdiction not only incurs substantial costs and technical complexities but also “could also lead to activity migrating to other jurisdictions, creating spillover risks,” as stated in the report.

“Restrictions should not substitute for robust macroeconomic policies, credible institutional frameworks, and comprehensive regulation and oversight, which are the first line of defense against the macroeconomic and financial risks posed by crypto-assets,” it said.

However, this doesn't imply that all prohibitions should be ruled out completely. According to the IMF and FSB, jurisdictions could contemplate the implementation of specific and time-limited restrictions as a means to address certain risk factors during periods of stress or while nations explore more effective domestic solutions. The document seemed to allude to instances of such restrictions in practice, including focused measures like the regulation of privacy-oriented "privacy" coins in locations such as Dubai and the prohibition of Nigerian banks from engaging with crypto-related businesses.

“Some jurisdictions, in particular emerging markets and developing economies (EMDEs), may want to take additional targeted measures that go beyond the global regulatory baseline to address specific risks,” it added.

Stablecoins

The IMF-FSB roadmap also tackled another worry shared by G20 nations regarding the widespread adoption of stablecoins. These digital currencies, designed to maintain a stable value by pegging them to other assets or currencies, had raised concerns about the potential to undermine the local currencies or trigger bank runs in emerging economies.

“Rapid capital flight (or reversals) could materialize if foreign currency-denominated stablecoins became easier and cheaper to hold in large quantities relative to foreign currency bank accounts,” the paper said.

While stablecoins have the potential to facilitate a diverse array of transactions, the report emphasized that they may also carry unique risks associated with their stability maintenance and reliance on private issuers. These concerns were vividly demonstrated in 2022 when the algorithmic stablecoin terraUSD rapidly decoupled from the U.S. dollar, causing billions in market value to evaporate within days.

It added that global stablecoins adopted by multiple jurisdictions “may transmit volatility more abruptly than other crypto-assets and may cause significant risk to financial stability.”