- A study carried out by the IMF acknowledges the necessity of stablecoins to some economies, and the subsequent difficulty in prohibiting them.
- The body proposes the creation of “complete, consistent, and coordinated global standards” for the purpose of regulating and supervising the issuance and trading of cryptocurrencies.
- According to the study, the popularity of stablecoins in emerging markets and developing economies highly increases the risk behind them.
The International Monetary Fund has issued a fresh warning in regards to the rapid growth of cryptocurrencies, and especially that of stablecoins. The governing body asserts that the rise of digital currencies poses serious challenges for the international financial system, and considers there to be an urgent need to adopt “comprehensive, consistent, and coordinated global standards are required to achieve effective crypto regulation and supervision”.
In a study published this week, the agency noted that “dollar-denominated stablecoins are growing in popularity in emerging market and developing economies as a potential store of value and hedge against inflation and exchange rate volatility, raising risks of dollarization and cryptoization”.
The IMF claims that the incorporation of large banks into the management, custody, and issuance of digital assets could give rise to new risks in the near future. The agency further underlined that the volatility of stablecoins and stock markets has become increasingly correlated.
The researchers behind the study, Parma Bains, Fabiana Melo, Arif Ismail, and Nobuyasu Sugimoto, warned that the lack of adequate regulation is causing the risk of possible contagion between the traditional finance and crypto ecosystem to increase day-by-day.
A Global Regulatory Framework Based on Risk
The study titled ‘Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements’, insists that any global regulatory framework drafted for stablecoins must be comprehensive and risk-based, but still flexible so as to provide a level playing field for all players.
The researchers suggest that such regulations should be based on the risk posed by stablecoins relative to their structural characteristics, and, in certain cases, to their use, thereby enabling regulators to review the terminology and marketing employed by issuers and intermediaries.
IMF experts explain that the main risks for stablecoin holders arise from the inability of issuers to fulfill the structural characteristics proposed for their respective tokens.
The most common of these aspects were highlighted to be: the denomination of the nominal value of the respective stable currency; the investment mandate for the composition of reserves; and the in-cash payment commitment (redemption) made by issuers.
The fund’s vision of a global regulatory framework seeks to encompass all conceivable issues, includng financial stability, consumer protection, monetary liquidity, markets, credit, as well as the reduction of operational, financial and market integrity, and concentration risks.
The study clarifies that, depending on the structure of the stablecoin, and the circumstances of each country, regulatory adjustments may vary. Likewise, it indicates that the proposal is not intended to impose a standardized format for regulatory frameworks, but rather to provide key elements for its definition.
On the Flipside
- The study marks a change in the IMF’s tone and perspective regarding cryptocurrencies and stablecoins.
"Stablecoins may play a role in the future of finance, but absent of robust regulatory frameworks, they will introduce significant risks," the study asserts.
On the other hand, the proposal highlights that, when developed and implemented “under appropriate regulation, stablecoins have the potential to reduce costs of cross-border remittances”, while also having the potential to improve and complement existing payments infrastructures.
Why You Should Care
- The ban on cryptocurrencies and stablecoins no longer seems to be the focus of the IMF, the United States, and most countries in the world.
- On the contrary, blockchain technology and cryptocurrencies are increasingly considered to have immense potential if subjected to appropriate regulatory frameworks.
"Broadly banning the use of crypto assets […] would likely stifle innovation and could trigger even stronger incentives for regulatory arbitrage and circumvention—and enforcing broad bans would be extremely difficult," the study's signatories acknowledged..
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