Cryptos pose financial stability challenges to economies, says IMF

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The International Monetary Fund has cautioned that the digital currency assets pose financial stability challenges while saying the rapid growth of the crypto ecosystem presents new opportunities. “The rapid growth of the crypto ecosystem presents new opportunities. Technological innovation is ushering in a new era that makes payments and other financial services cheaper, faster, more accessible, and allows them to flow across borders swiftly,” said in a chapter of its latest report Global Financial Stability Report.

In its report, the IMF said crypto asset technologies have the potential as a tool for faster and cheaper cross-border payments. Bank deposits can be transformed to stable coins that allow instant access to a vast array of financial products from digital platforms and allow instant currency conversion, it said.

Decentralised finance could become a platform for more innovative, inclusive, and transparent financial services, it added.

“Despite potential gains, the rapid growth and increasing adoption of crypto assets also pose financial stability challenges,” the IMF said.

The IMF in its report said that challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto asset providers, investor protection risks for crypto-assets and DeFi, and inadequate reserves and disclosure for some stable coins.

Crypto assets can increase cryptoisation in emerging markets

“In emerging markets, the advent of crypto assets has benefits but can accelerate cryptoisation and circumvent exchange and capital control restrictions. Increased trading of crypto-assets in these economies could lead to destabilising capital flows,” it said.

“Policymakers should implement global standards for crypto-assets and enhance their ability to monitor the crypto ecosystem by addressing data gaps. As the role of stable coins grows, regulations should correspond to the risks they pose and the economic functions they perform. Emerging markets faced with cryptoisation risks should strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies,” the report said.

In a joint blog post, three IMF officials Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou wrote that as crypto assets take hold, regulators need to step up.

“Crypto-assets offer a new world of opportunities: Quick and easy payments. Innovative financial services. Inclusive access to previously “unbanked” parts of the world. All are made possible by the crypto ecosystem,” they wrote. “But along with the opportunities come challenges and risks,” it added.