MIL-OSI Translation: The Rise of Cryptoassets: New Challenges for Financial Stability


MIL OSI Translation. Government of the Republic of France statements from French to English –

Source: IMF in French

(Photo: RealPeopleGroup / iStock by Getty Images)

Dimitris Drakopoulos, Fabio Natalucci and Evan Papageorgiou

October 1, 2021

Regulators must respond to the rise in cryptoassets.

Cryptoassets offer a myriad of new possibilities: they allow easy and fast payments and pave the way for innovative financial services, including in previously unbanked parts of the world. All of this is made possible by the cryptoasset ecosystem.

But with these new possibilities come challenges and risks. The latest edition of World Financial Stability Report looks at the risks associated with the cryptoasset ecosystem, and proposes measures to facilitate the exploration of this uncharted territory.

The Cryptoassets Ecosystem – What are we talking about, and what are the risks?

The market value of total cryptoassets in circulation exceeded $ 2 trillion in September 2021, 10 times more than in early 2020. At the same time, a whole ecosystem is being set up, with exchanges, electronic wallets, “minors” and issuers of stable cryptocurrencies.

Many of these entities have weaknesses in their operational, governance and risk practices. As a result, crypto-asset exchanges have experienced considerable disruption during episodes of market turmoil. In addition, several high-profile hacking cases have resulted in the theft of funds placed by users. So far, these incidents have not had a significant effect on the stability of the financial system. However, as cryptoassets democratize, the potential impact on the economy at large is bound to increase.

The risks for consumers remain high, because transparency and monitoring mechanisms are insufficient or inadequate. So while over 16,000 different cryptoassets have been listed on different exchanges, there are only about 9,000 today, the rest having vanished in one way or another. Many of these cryptoassets have zero trading volumes; in other cases, the initiators of a project left the game along the way. Some cryptoassets have been created exclusively for the purposes of speculation, or even outright fraud.

In addition, the pseudo-anonymity of cryptoassets creates data gaps for regulators, and can open the door to money laundering and terrorist financing. While authorities are likely to trace illicit transactions, they are not always able to identify the parties to these transactions. Additionally, the cryptoasset ecosystem faces different regulatory frameworks across countries, complicating coordination efforts. Thus, most transactions on cryptoassets are conducted through entities that primarily operate from offshore financial centers. This makes monitoring and control measures very difficult, if not impossible, to apply in the absence of international collaboration.

Stable cryptocurrencies, which generally seek to peg to the dollar, are also experiencing tremendous growth: their volume has quadrupled in 2021 and now reaches $ 120 billion. However, the term “stable cryptocurrency“Covers a very diverse set of cryptoassets, and can be misleading. Given the composition of their reserves, some stable cryptocurrencies could give rise to episodes of investor panic, with a risk of contagion to the financial system. These episodes of panic could arise because of investor concerns about the quality of their reserves or the possibility of quickly liquidating these reserves to meet possible repayments.

Considerable problems to be solved

The adoption of cryptoassets is certainly a phenomenon whose scale is difficult to assess, but surveys and other measures indicate that emerging countries and developing countries may well be the first countries affected. In particular, the volume of crypto-asset transactions carried out by residents of these countries increased sharply in 2021.

Going forward, the rapid and widespread adoption of cryptoassets could pose significant challenges by further dollarization – or, in this case, cryptoization – of the economy, as residents begin to use cryptoassets in the future. instead of local currency. Cryptoization risks hampering the ability of central banks to effectively implement monetary policy. It also risks destabilizing the financial system, for example by creating funding and solvency risks associated with currency mismatches, and exacerbating some of the above-mentioned risks to consumer protection and financial integrity.

Threats to fiscal policy could also multiply, given the potential of cryptoassets for tax evasion. On the other hand, seigniorage (the financial benefit that comes from minting a currency) is also likely to suffer from the boom in cryptoassets. The increased demand for cryptoassets could also encourage capital outflows, with consequences for the forex market.

Finally, given the large amount of energy they require, a shift in “mining” activities from China to other emerging countries and to developing countries can have significant effects on their domestic consumption of energy. energy – especially in countries that depend on energy sources with high CO2 emissions, and in countries that subsidize energy expenditure.

Government action

The first step is for regulators and supervisors to be able to track rapid developments in the cryptoasset ecosystem and understand the risks they pose by rapidly closing data gaps. Due to the global nature of cryptoassets, authorities need to strengthen international coordination to minimize the risk of regulatory arbitrage and to ensure effective oversight and enforcement.

National regulatory authorities should also enforce existing international standards as a matter of priority. Most of the standards applicable to cryptoassets are currently limited to the fight against money laundering and proposals concerning bank exposures. However, other international standards – pertaining to securities regulation, payments, clearing and regulations – may also apply to cryptoassets, and should receive the attention of authorities.

Given the growing role of stable cryptocurrencies, their regulation must be commensurate with the risks they represent and the economic functions they perform. Thus, the rules applied to them should be aligned with those governing entities offering similar products (eg bank deposits or money market mutual funds).

In some emerging and developing countries, cryptoization can result from the lack of credibility of central banks, weaknesses in banking systems, inadequate payment systems and limited access to financial services. Above all, authorities need to strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies and improving payment systems. These are likely to limit the trend towards cryptoization, provided they meet the need for improvements in available payment technologies.

The priority for leaders around the world must be to make cross-border payments faster, cheaper, more transparent and more accessible, building on the G20 roadmap on cross-border payments.

To reap the benefits of cryptoassets while addressing the vulnerabilities they represent, it is important to take swift, decisive and well-coordinated global action.


Dimitris Drakopoulos is a Senior Financial Sector Expert in the Global Markets Analysis Division of the IMF’s Monetary and Capital Markets Department. He participates in the drafting of the Global Financial Stability Report, in particular for issues relating to emerging countries, fixed income markets and crypto assets, and is part of the IMF’s market surveillance team. Prior to joining the IMF, he worked at Nomura’s London headquarters, including as director of studies for emerging countries in Europe, the Middle East and Africa, and as senior economist for the euro area. Dimitris began his career at Lehman Brothers, where he was responsible for interest rate derivatives. He holds a master’s degree in economics from Birkbeck University in London, and a bachelor’s degree in economics and social policy from the London School of Economics.

Fabio M. Natalucci is one of the deputy directors of the Monetary and Capital Markets Department. He is responsible for the World Financial Stability Report, which presents the IMF’s assessment of risks to the stability of the global financial system. Prior to joining the IMF, Natalucci served as Senior Associate Director in the Monetary Affairs Division of the Board of Governors of the United States Federal Reserve System. From October 2016 to June 2017, he served as Assistant Secretary for International Financial Stability and Regulation in the United States Department of the Treasury. He received his doctorate in economics from New York University.

Evan Papageorgiou is Deputy Head of the Global Market Surveillance and Analysis Division in the IMF’s Monetary and Capital Markets Department. He participated in the drafting of the Global Financial Stability Report, in particular for issues relating to emerging countries, sovereign credit risk, fixed income markets and sustainable finance. He was previously with the Nordic Unit of the IMF’s Europe Department, where he worked on macroprudential policies, household savings and the external sector. Prior to joining the IMF, Evan was responsible for fixed income strategy at brokerage firms in London and New York, where he primarily dealt with local interest rates and foreign exchange trading in the markets. emerging. He holds a doctorate in operations research and financial engineering from Princeton University.

EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

MIL Translation OSI