## REGULATING CRYPTO

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**Canonical URL:** [REGULATING CRYPTO](https://www.imf.org/-/media/files/publications/fandd/article/2022/september/narain.pdf)

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### Why crypto regulation has moved to the top of the policy agenda
- Crypto assets have shifted from niche products to mainstream roles as speculative investments, hedges against weak currencies, and potential payment instruments.
- Spectacular, if volatile, growth in crypto market capitalization and increased integration with the regulated financial system have heightened regulatory urgency.
- Failures of crypto issuers, exchanges, and hedge funds, along with a recent slide in crypto valuations, have accelerated calls to regulate.

### Key regulatory challenges
- Rapid evolution of crypto technology and products makes it difficult for regulators to keep pace; regulators face stretched resources and skill gaps.
- Data scarcity and the difficulty of monitoring thousands of actors who may not be subject to typical disclosure or reporting requirements impede effective oversight.
- Fragmented terminology and lack of global harmonization complicate regulatory design and coordination.
- Crypto assets can attract attention from multiple domestic regulators (banks, commodities, securities, payments) with different frameworks and objectives; priorities vary across consumer protection, safety and soundness, and financial integrity.
- Many crypto actors—miners, validators, protocol developers—are not easily covered by traditional financial regulation.
- Entities in crypto markets may be hard to identify due to underlying technology or because participants play casual or voluntary roles, complicating governance, prudence, and fiduciary responsibility enforcement.
- Centralization of conflicting roles in certain entities, such as crypto exchanges, creates additional regulatory dilemmas.

### Technology-related risks and systemic considerations
- Crypto assets are electronic codes that may or may not be backed by physical or financial collateral; some are pegged to fiat currencies or other items of value, others are unbacked.
- The electronic life cycle amplifies technology-related risks, notably cyber and operational risks, evidenced by high-profile losses from hacking or accidental loss of control, access, or records.
- Functions traditionally provided by the mainstream financial system—leverage and liquidity provision, lending, storing value—are now emulated in crypto, drawing mainstream players into competition for funding.
- Growing integration raises questions about applying the “same activity, same risk, same rule” principle to crypto and whether crypto systems might later seek central bank facilities and safety nets.
- Environmental/public-policy trade-offs arise from the “enormous energy intensity of ‘mining’ certain types of crypto assets,” which national authorities may need to weigh.

### Contrasting national approaches and international action
- National responses vary widely:
  - Some authorities have prohibited issuance, holding, or certain uses (such as payments) of crypto assets by residents.
  - Other countries have actively encouraged crypto development and sought to attract companies.
- Fragmented responses risk regulatory arbitrage as crypto actors migrate to friendlier jurisdictions while remaining accessible via the internet.
- Early international concerns focused on financial integrity and misuse for money laundering and illegal transactions; the Financial Action Task Force provided a global framework for virtual asset service providers.
- IOSCO issued regulatory guidance on crypto exchanges.
- The announcement of Libra (a proposed “global stablecoin”) intensified global regulatory attention.
- The Financial Stability Board has monitored crypto markets, released principles to guide regulatory treatment of global stablecoins, and is developing guidance for broader crypto assets, including unbacked crypto assets.
- Other standard-setters are developing guidance on:
  - Application of principles for financial market infrastructures to systemically important stablecoin arrangements (Committee on Payments and Market Infrastructures and IOSCO).
  - Prudential treatment of banks’ exposures to crypto assets (Basel Committee on Banking Supervision).

### IMF position and rationale for a global framework
- The IMF calls for a global regulatory response that is:
  - Coordinated: to fill regulatory gaps from cross-sector and cross-border issuance and to ensure a level playing field.
  - Consistent: to align with mainstream regulatory approaches across activities and risks.
  - Comprehensive: to cover all actors and all aspects of the crypto ecosystem.
- A global regulatory framework is expected to:
  - Bring order to markets.
  - Help instill consumer confidence.
  - Lay out limits of permissible activity.
  - Provide a safe space for useful innovation to continue.

*Aditya Narain and Marina Moretti, IMF Monetary and Capital Markets Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/september/narain.pdf_