In a blog post by the head of the Monetary and Capital Markets Department, Tobias Adrian, the International Monetary Fund (IMF) has called for a definitive global regulation of the cryptocurrency market. With digital assets growing significantly in recent months, Adrian warned of the risks in the evolving sector that “could soon become systemic in some countries.”

Desperate for a framework

As reported by business portal MoneyWeek, the IMF seeks to apply a “comprehensive, coherent, and coordinated" regulation to bitcoin and other digital currencies to “safeguard the stability of the international monetary and financial system,” which is being “profoundly” changed by crypto assets.

Adrian alludes to the fact that crypto assets and associated products and services have grown rapidly in recent years, but that this is still an unregulated financial system. In fact, the IMF is concerned that “interconnections” with the regulated financial system are increasing.

Determining the valuation —Adrian claims— is not the only challenge in the crypto ecosystem, as “identifying, monitoring, and managing risks can challenge regulators and businesses. These include, for example, the operational and financial integrity risks of crypto asset exchanges and wallets, investor protection and inadequate reserves, and inaccurate disclosure of some stablecoins.”

In addition, Adrian —together with Dong He and Aditya Narain from the same department— stresses that in emerging markets and developing economies, the advent of cryptography can accelerate what he has defined as “cryptoization,” which takes place “when these assets replace the national currency and bypass exchange restrictions and account management measures.”

Urgency

The IMF called for “comprehensive international standards” that more fully address the risks that cryptocurrencies can pose to the financial system, as well as its associated ecosystem and related transactions.

With a market cap of $2.5 trillion, the value of the underlying blockchain technology could also “reflect froth in an environment of stretched valuations.”

The IMF’s Financial Stability Board is currently working to develop a global framework to regulate crypto assets and provide an approach to managing risks to financial stability and market conduct.

Adrian said: “Existing laws and regulations may not allow national approaches that comprehensively cover all elements of these assets. Importantly, many encryption service providers operate across borders, making monitoring and enforcement difficult. Uncoordinated regulatory measures can facilitate potentially destabilizing capital flows.”

What type of regulation?

In the IMF’s view, regulation should contain several elements. The first one is the fact that crypto asset service providers that provide critical functions must be licensed or authorized. These would include storage, transfer, liquidation, and custody of reserves and assets —among others— similar to the existing rules for financial service providers.

Also, requirements should be tailored to the main cryptoassets and stablecoins use cases. “For example, services and products for investments should have requirements similar to those of brokers and dealers, supervised by the securities regulator; services and products for payments should have requirements similar to those of bank deposits, supervised by the central bank or payment supervisory authority.”

Regardless of the initial authority to approve crypto products and services, all supervisors —from central banks to securities and banking regulators— must coordinate to address the various risks that arise from different and changing uses.

Further, authorities must provide clear requirements to regulated financial institutions regarding their exposure and commitment to cryptocurrencies. For example, appropriate banking, securities, insurance, and pension regulators should stipulate capital requirements.