According to a recent paper published by the IMF, the fast expansion of crypto assets, associated products and services, and their interactions with the regulated financial system are compelling the need for worldwide crypto regulation that must be comprehensive, consistent, and co-ordinated by world authorities.
According to the paper posted on the international financial institution's website, “Policymakers struggle to monitor risks from this evolving sector, in which many activities are unregulated. In fact, we think these financial stability risks could soon become systemic in some countries.”
Tobias Adrian, Financial Counsellor and Director of the IMF's Monetary and Capital Markets Department, Dong He, Deputy Director of the Monetary and Capital Markets (MCM) Department of the IMF, Aditya Narain, Deputy Director of the MCM Department of the IMF, and Tobias Adrian authored this paper. The three authors warned that countries with uncoordinated regulatory measures might be vulnerable to potentially hazardous global capital flows.
The authors stated that, “While the nearly [USD] 2.5 trillion market capitalization indicates significant economic value of the underlying technological innovations such as the blockchain, it might also reflect froth in an environment of stretched valuations. Indeed, early reactions to the Omicron variant [of the COVID-19virus] included a significant crypto selloff.”
The necessity for global crypto regulation is based on the authors' observation that cryptocurrencies' cross-sector and cross-border remit restrictions negate national responses.
In addition, they explained that monitoring and enforcement become more difficult when many crypto service providers operate across borders.
The article explained that the proposed worldwide regulatory framework should ensure a level playing field across the activity and risk spectrum, with the following three components::
- Licensed and authorized crypto asset service providers that execute critical tasks should be permitted or licensed to perform them
- Requirements should be tailored to the primary use cases of cryptocurrencies and stablecoins, implying that services and goods for investments must satisfy securities regulations
- authorities should set clear criteria for regulated financial institutions' exposure to and engagement with cryptocurrencies
The researchers believe that establishing a unified regulatory framework for cryptocurrencies is a difficult task, and he adds that it will be especially challenging to create a thorough, consistent, and coordinated regulatory approach to crypto.
“But if we start now, we can achieve the policy goal of maintaining financial stability while benefiting from the benefits that the underlying technological innovations bring,” the authors concluded.