International Monetary Fund flag waving

IMF reminds policymakers of need for tighter digital currency regulations

The International Monetary Fund has released its Global Financial Stability Report, urging policymakers to pay significant attention to digital assets in the wake of a tumultuous 2022.

The report highlighted the need for governments worldwide to issue “comprehensive and consistent regulation and adequate supervision” to mitigate pervading risks in digital assets. The IMF urged regulators to ensure stablecoin issuers comply with proper requirements for storage while ensuring the full backing of their reserves.

Although the report centered on the need for heightened regulations, a large section chronicled the torrid patch faced by investors in digital assets, starting with the Terraform Labs and Celsius collapses. The IMF pointed out that the contagion effects of the collapse laid the foundations for bigger industry collapses like FTX and financial institutions like Silicon Valley Bank (SVB).

“SVB’s spillover from the core financial sector reverberated across the crypto ecosystem and financial institutions exposed to it,” said the IMF. “Its failure resulted in a de-pegging of two stablecoins (Circle USDC and Dai) which held uninsured deposits in the bank, as well as the demise of Signature Bank of New York because investors became concerned about its footprint in the crypto sector.”

For all its scathing criticisms of digital currencies, the IMF report did not push for a blanket ban in the mold of Chinese regulators. Instead, the body opted to endorse a policy framework that warned central banks to avoid conferring digital currencies with the status of legal tender.

The IMF has warned that rising adoption rates of digital assets could trigger massive capital flights from the financial system, “cryptoization,” and, in the absence of proper guard rails, trigger losses for investors. After El Salvador made BTC a legal tender, the IMF was the loudest critic as it condemned the decision in multiple reports to dissuade other countries from going on the same path.

Global regulations are in the offing

Several financial monitoring bodies are releasing recommendations for central banks and other policymakers to follow in crafting wholesome regulations for digital assets. The Financial Stability Board (FSB) and the Bank for International Settlements (BIS) have published guidelines for stablecoin controls, suggesting that their controls should be similar to banks.

India-led G20 is also inching toward a global virtual currency regulatory framework to prevent “regulatory arbitrage.” A meeting of the G20’s finance ministers and central bank governors in February confirmed that the foundations were laid to achieve the objectives before the end of 2023.

Watch: Law & Order Regulatory Compliance for Blockchain & Digital Assets

YouTube video

New to blockchain? Check out CoinGeek’s Blockchain for Beginners section, the ultimate resource guide to learn more about blockchain technology.