Speech

The Changing Landscape of Crypto Assets—Considerations for Regulatory and Supervisory Authorities

February 23, 2024

Good morning and welcome to the IMF. It is my pleasure to be here with you today to open the third and final day of what has been a successful and productive week.

My congratulations to the Office of the Comptroller of the Currency (OCC) for hosting a fantastic event yesterday with a wonderful set of speakers, and the Financial Stability Board (FSB) for providing another important Crypto Working Group meeting the day before.

Today, I’ll aim to highlight some of the main issues we observe in the face of greater use of crypto assets across the world, as well as provide you with an understanding of how the Fund seeks to help its member countries to implement the FSB Global Regulatory Framework for Crypto Asset Activities.

Macro and financial stability implications of crypto assets

Crypto assets have implications for macroeconomic and financial stability that are mutually interactive and reinforcing. Therefore, a comprehensive policy and regulatory response is necessary to address the risks of crypto assets.

At the IMF, a key part of our mandate is the safety and soundness of the international monetary system, as well as global macroeconomic and financial stability.

While crypto markets do not currently pose a risk to financial stability in most jurisdictions, adoption of crypto assets tends to be higher in emerging markets and low-income jurisdictions.

Widespread adoption of crypto assets in these countries could undermine the effectiveness of monetary policy, circumvent capital flow management measures, exacerbate fiscal risks, and divert resources from financing the real economy. We must remain vigilant to the growth of crypto asset markets, and their interlinkages with incumbent financial institutions.

The rapid growth of stablecoins denominated in foreign currencies in many emerging economies requires a careful understanding of risks. For example, many emerging economies lack effective legal and regulatory oversight. These economies also lack legal provisions for “bankruptcy remoteness,” meaning reserve assets can be commingled and not be secured if the issuer or its affiliates fail. This creates a situation where reserve assets tend to be managed by custodians located in advanced economies.

Therefore, a shift from foreign exchange deposits to foreign exchange denominated stablecoins often creates capital outflows from the local banks in emerging economies to the reserve assets managed by the custodian in advanced economies. Such outflows could potentially trigger higher volatility of the local currency and exert pressure on macroeconomic growth.

Regulation and supervision of crypto asset issuers and service providers doesn’t directly solve the macroeconomic and financial stability issues. Yet, the establishment and effective implementation of regulation and supervision is an important foundation for better data collection, effective capital flow measures, and fiscal and tax policies.

Therefore, the IMF is very pleased to deepen cooperation with the FSB, as well as with other standard-setting bodies and regulatory authorities around the world.

We’ve done a lot of work in the space of crypto and macroeconomic stability. In October 2021, we shared our emerging thoughts on the impact of crypto on macroeconomic stability through the Global Financial Stability Report. It was here that we first explored the concept of “cryptoization,” referring to how widespread and rapid adoption of crypto assets could reinforce dollarization forces in the economy.

Almost exactly a year ago, we published a policy paper endorsed by our Executive Board on the elements for effective crypto policies, as well as our note to the G20 on the macrofinancial implications of crypto assets. In this note to the G20, we shared our analysis that the widespread proliferation of crypto assets comes with substantial risks to the effectiveness of monetary policy, exchange rate management, and capital flow management measures, as well as to fiscal sustainability.

Moreover, expanded use of crypto assets also requires changes to central bank reserve holdings and the global financial safety net, resulting in potential further instability.

In September 2023, we worked seamlessly with the FSB secretariat to produce the IMF-FSB Synthesis Paper: Policies for Crypto-Assets. The paper describes how the policy and regulatory frameworks by the IMF and the FSB (alongside standard-setting bodies) fit together and interact with each other.

Crypto challenges for resource-constrained authorities

While activities in crypto markets often mirror those in traditional financial services, they are typically delivered in a novel way using distributed ledgers. This can be challenging from a regulatory and supervisory perspective, particularly for resource-constrained authorities.

To understand the challenges, we need to look a little more closely at the layers of technology used to support distributed ledgers. The deeper layers of distributed ledger technology, such as the network and consensus layers, help ensure that there is a single, sequenced, standardized, and cryptographically-secured record of activity. However, it is not practical for regulators to have technical expertise in building and maintaining blockchain networks. Yet at the same time, understanding the fundamentals and the trade-offs of different consensus mechanisms is important.

Accessing and monitoring pseudonymous blockchain data is challenging for non-experts. In many emerging economies, there is a lack of available skills to build and maintain these tools.

Some authorities partner with blockchain analytics firms to better monitor blockchain data. However, supervisors must understand the strengths and limitations of blockchain analytics tools.

Supporting countries through surveillance and capacity development

The uneven growth of crypto markets across the world means the challenges regulators face are different. At the same time, the capacity of regulators to monitor and respond to risks generated by crypto markets is also different.

The IMF has the unique privilege of a near universal membership composed of advanced, emerging, and low-income countries. Our teams work closely with authorities in our member countries across the world to understand how crypto might impact their financial markets and economies.

We listen to their concerns and observations, identify risks, and analyze their capacity to respond to those risks. The information and data we gather from these interactions allows us to better understand growing trends and challenges.

We use this information to help authorities to close data gaps, as well as assist them with prioritizing responses to the most critical issues among various competing tasks. And, with this collaborative approach, we were recently able to disseminate best practice before the implementation of global standards through our Fintech Notes on regulating crypto ecosystem and a supervisory primer on blockchain consensus mechanisms.

As global standards developed, including the FSB recommendations and standards and guidance from the standard-setting bodies, we began incorporating these into our surveillance in jurisdictions where crypto assets have the potential for systemic impact.

For example, the IMF’s Financial Sector Assessment Program, or “FSAP,” started pilot exercises in 2018 to cover fintech and crypto assets issues. Over the past several years, reviewing crypto regulation has been a part of our financial sector assessments for Hong Kong, Ireland, Singapore, Switzerland, and the United States. Some of the assessments include a wider examination taking into account other financial technology components.

Last year, we conducted an FSAP on the regulation and supervision of crypto assets in Kazakhstan, our first standalone crypto workstream as part of an FSAP, reflecting the growing interest in crypto markets, particularly in emerging market economies.

When crypto assets fall within the scope of these assessment programs due to their potential systemic impact in a specific jurisdiction, the implementation of corresponding recommendations will also be evaluated. At that point, the focus would be on highlighting any existing implementation gaps.

The establishment of robust global standards, including the two FSB high level recommendations on regulation and supervision of crypto assets, will help us to guide our surveillance work more effectively and efficiently.

Moving onto capacity development, another core function of the IMF, there are several ways in which we can support our members to implement global standards and recommendations.

One way is through our regional training programs. Together with our regional training and capacity development centers across the world, we deliver courses on fintech regulation, including a component on crypto regulation. Here we provide practical guidance on implementing the standards set by the FSB, the Basel Committee on Banking Supervision, and the International Organization of Securities Commissions (IOSCO).

In fact, the FSB secretariat has delivered a session at each of our courses since the finalization of the high-level recommendations and we look forward to welcoming IOSCO officials to future fintech courses.

Over the past 12 months we have reached over 250 individual supervisors from around 60 different regulatory authorities.

The second way is through bilateral technical assistance. Over the past 12 months, we have provided assistance on crypto regulation to jurisdictions across Asia, Africa, and the Americas.

This involves working closely with regulatory authorities in a country over a period spanning several months, engaging with industry, government departments and other relevant stakeholders, and offering recommendations to ensure crypto frameworks are implemented in a way that is consistent with global standards and recommendations.

Conclusion

With that, I would like to thank you for your participation as part of the conference this week and wish you a productive day. We have some fantastic speakers lined up today, and IMF experts will be on hand to speak with you throughout the day on the work we are doing in this space.

In-person meetings of the Crypto Working Group are rare, but to have the knowledge and insight of this extended audience available to us in one place is rarer still. I encourage all of you to make the most of this opportunity and explore with your counterparts the experience, observations, and challenges that different authorities are facing across the globe.