The International Monetary Fund (IMF) recently released recommendations on how to effectively regulate the cryptocurrency industry around the world.
In a recent blog post, the IMF acknowledged that crypto assets are rapidly revolutionizing the entire global financial system. However, policymakers still struggle to monitor the risks associated with the market.
Regulators must act quickly
The financial institution pointed out that the rapid growth of the crypto space has caused it to interconnect with regulated economic systems while still not being regulated.
The IMF noted that these interlinkages could pose serious risks if global financial regulators do not act quickly to mitigate the threats and harness the revolutionary power of crypto.
“Policymakers find it difficult to monitor the risks of this evolving industry, in which many activities are unregulated. In fact, we believe that these risks to financial stability may soon become systemic in some countries, ”the report says.
The IMF called for a “comprehensive, consistent, and coordinated” approach to regulating the crypto space, emphasizing that uncoordinated regulatory measures may “facilitate potentially destabilizing capital flows” since most crypto firms operate across borders.
The IMF’s suggestion
To effectively regulate crypto globally, the IMF has listed three basic requirements that regulators must include.
First, crypto service providers that deliver several critical functions, including transfer, storage, settlement, and custody of digital assets, should be licensed or authorized. The criteria for licensing should also be clearly stated, with the relevant bodies assigned.
Second, the requirements should be suitable for the main use cases of these crypto assets. For example, investment products should have requirements similar to those of stockbrokers and should be overseen by securities regulators. Payment products should have similar requirements as banks and should be regulated by the central bank.
Third, the governments of different countries should mandate regulated financial institutions to provide clear and comprehensive details of their crypto exposure and engagements.
The IMF has also warned of the increasing use of cryptocurrency in most developing countries. It said:
“Some emerging markets and developing economies face more immediate and acute risks of currency substitution through crypto assets, the so-called cryptoization. Capital flow management measures will need to be fine-tuned in the face of cryptoization.”
Earlier in July, shortly after El Salvador adopted Bitcoin as legal tender, the IMF warned that using crypto as a national currency was very risky.
