Unbacked crypto-assets pose financial and financial risk, IMF warns

Assets in cryptocurrency, which are not backed by states, can threaten the effectiveness of monetary policy, pose financial and financial risks, make capital flows volatile and will fragment global payment systems, says a research paper from the International Monetary Fund.

The paper was presented to the G20 finance ministers and central bank governors in February in Bengaluru, and was published on Monday.

“Widespread spread of crypto-assets comes with significant risks to the effectiveness of monetary policy, exchange rate management and capital flow management measures, as well as to fiscal sustainability. In addition, it may require changes in central bank reserve holdings and the global financial safety net, creating potential instability. To In the end, the banks may lose deposits and have to limit lending, the report says.

The paper, which focused only on unbacked cryto-assets, said there could be some benefits, such as better financial inclusion, spurring private sector innovation, and that the underlying technology (such as blockchain) could have many uses.

It added that the crypto-asset market has grown in complexity and shown significant volatility, illustrated by the fact that the size of the crypto-asset market has fluctuated dramatically, peaking at nearly $3 trillion in November 2021, before crashing to below $1 trillion today.

Policymakers are pushing for tighter guidelines including regulation, it said, adding that while cryptoassets are not yet a significant part of the global financial system, they are becoming a source of systemic risk in certain jurisdictions.

“The widespread use of cryptoassets can threaten the effectiveness of monetary policy. Monetary policy transmission will weaken if businesses and households prefer to save and invest in cryptoassets that are not tied to the domestic fiat currency… Unbacked cryptoassets and stablecoins without credible backing can pose financial stability risks due to their volatile prices. Stablecoins can also disintermediate banks,” the paper says.

It said declaring a crypto-asset as legal tender could create fiscal risks as government revenues would be exposed to exchange rate risk if taxes are denominated in advance in a crypto-asset while spending largely remains in local currency. Also, the use of cryptoassets can increase the risk to public finances even without changing legal tender laws, as pseudonymous cryptoassets can undermine tax revenue and compliance.

Earlier this month, the central government brought crypto assets under the purview of the Prevention of Money Laundering Act. Last month, at the G20 meeting, IMF Managing Director Kristalina Georgieva backed India’s stance on private cryptocurrencies and other digital assets, saying a strong push for global regulation of such assets is needed.

Indian government officials and the Reserve Bank of India have argued that while there is a need for strong global regulations for private crypto assets, bans should be an option in certain cases. Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das said at the same event that India’s position was supported by other nations.