Crypto regulation must be comprehensive, consistent, and coordinated: IMF

• The IMF admitted that the crypto ecosystem faces numerous challenges apart from valuation which is usually cited by critics.

• To formulate regulations that provide a level playing field along with the activity and risk spectrum, IMF recommended three key elements to the global financial regulators. 

The crypto market is currently valued at over $2 trillion and has been predicted to double its market cap in the near future. The increasing use of digital assets has led to the rising discussion of regulating the market. According to the International Monetary Fund (IMF), any formulated crypto regulation must be comprehensive, consistent, and coordinated. 

In a blogpost, the IMF admitted that the crypto ecosystem faces numerous challenges apart from valuation which is usually cited by critics. According to the post, monitoring, identification, as well as management of risks defy regulation and firms. 

These include, for example, operational and financial integrity risks from crypto-asset exchanges and wallets, investor protection, and inadequate reserves and inaccurate disclosure for some stablecoins.

It was also mentioned that emerging markets and developing economies see the acceleration of what is called “Cryptoization”.

They pointed out that the unregulated crypto market has interlinked with regulated economic systems due to the growing adoption. According to the IMF, this poses a serious threat if global financial regulators do not act fast with a standardized regulation. 

Policymakers struggle to monitor risks from this evolving sector, in which many activities are unregulated. In fact, we think these financial stability risks could soon become systemic in some countries.

Three key recommendations by the IMF

To formulate regulations that provide a level playing field along with the activity and risk spectrum, IMF recommended three key elements to the global financial regulators. 

Firstly, the IMF recommends that crypto service providers with important functions should be licensed or authorized. Existing rules of the financial asset providers must be applied to crypto firms that offer storage, transfer, custody or reserves and assets, settlements, and other services. 

Licensing and authorization criteria should be clearly articulated, the responsible authorities clearly designated, and coordination mechanisms among them well defined.

Secondly, requirements must be tailored to the main use case of cryptos ad stablecoins. This means services and investments must be bound with the same requirement set for securities brokers and dealers overseen by securities regulators. Also, services and products for investment must have the same requirements as those of bank deposits overseen by the central bank. 

Regardless of the initial authority for approving crypto services and products, all overseers—from central banks to securities and banking regulators—need to coordinate to address the various risks arising from different and changing uses.

Finally, there should be a provision of requirements on regulated financial institutions concerning their exposure to and engagement with crypto. 

For example, the appropriate banking, securities, insurance, and pension regulators should stipulate the capital and liquidity requirements and limits on exposure to different types of these assets, and require investor suitability and risk assessments.

The IMF also issued a warning to emerging and developing economies that the growing crypto market can lead to currency substitution through cryptoization. According to the report, there is a need for capital flow management measures to be fine-tuned while facing cryptoization.