## Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries

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### I. Purpose, scope, and key market statistics
- Purpose: analyze how crypto assets could impact capital flow management measures (CFMs) from a structural and longer-term perspective and identify possible policy responses and strategies.
- Focus: preserve authorities’ preferences about exchange regimes and capital account management; does not advocate for or against CFMs.
- Related work: companion paper tentatively titled “Capital Flow Management Measures in the Digital Age (II): Design Choices of CBDC” is mentioned as forthcoming.
- Key statistics and market scale:
  - Global market size of crypto assets: $2–$3 trillion.
  - Crypto assets represent about 1 percent of total market value of financial assets.
  - Stablecoins have gained market share since 2020; trading of US dollar–linked stablecoins vis-à-vis some emerging market and developing economy currencies has soared since 2020.
  - DeFi has grown into a multibillion-dollar industry.
  - Top 20 countries with highest “intensity of crypto adoption” are mostly EMDEs from Asia, Latin America, and sub-Saharan Africa; the United States is the only advanced economy in the group.
  - FARI findings: more than 90 percent of IMF member countries had some types of restrictions on capital flows in place at the end of 2019; out of those, 21 countries had extensive restrictions in place.

### Drivers of crypto-asset adoption
- Macrofinancial drivers:
  - Volatile macroeconomic conditions (currency depreciation, high inflation) tend to boost crypto-asset adoption (empirical evidence from a panel regression model).
  - Desire to hedge against macrofinancial risks in economies with weaker fundamentals.
- Institutional and regulatory drivers:
  - Gaps in regulation, lack of a common and consistent taxonomy of crypto assets, and cross-border operation of many crypto service providers make supervision and enforcement by national authorities more difficult.
  - CFMs often rely on intermediaries to verify transaction nature and counterparties’ identities; P2P trading and unhosted wallets undermine that verification.
- Demographic and behavioral drivers:
  - Younger population age structure tends to boost crypto-asset adoption.
  - Ease of payments with cryptos, perceived anonymity, novelty and lure of crypto assets—particularly among the young—drive adoption.
- Structural and market-structure drivers:
  - Retail investors have been important drivers of adoption; institutional investors and corporations contributed notably to the 2020–21 rally in advanced economies in North America and Europe.
  - Market structure changes: rise in stablecoins and growth of DeFi.

### Crypto-assets ecosystem (definitions and components)
- Definition: privately issued digital assets that depend primarily on cryptography and distributed ledgers (blockchains).
- Types:
  - Earlier crypto assets (e.g., Bitcoin): issued in their own denomination, not a liability of any entity.
  - Stablecoins: designed to maintain a stable value relative to a specific asset or pool of assets via reserves and sometimes algorithms.
- Functional entities: exchanges, wallet providers, miners, stablecoin issuers and custodians.
- On-chain vs off-chain:
  - On-chain: actions executed through the blockchain; public but pseudonymous on public blockchains.
  - Off-chain: actions not executed through the blockchain itself but handled by a network participant (for example, an exchange).
- Centralized vs decentralized:
  - Centralized entities: legally incorporated, act as intermediaries, rely on private records (off-chain).
  - Decentralized entities: depend primarily on code executed on-chain (DeFi platforms, smart contracts), often without legal incorporation.
- Wallet types: hot vs cold; hosted (custodial) vs unhosted (noncustodial). Unhosted wallets can obscure who controls assets and the residency of transacting parties.
- Exchanges: most large crypto exchanges are centralized and serve as on- and off-ramps for sovereign currencies; peer-to-peer (P2P) transactions occur without intermediaries.

### How crypto assets challenge CFMs (mechanisms of circumvention)
- CFMs normally require intermediaries to:
  - Verify identities/residency of counterparties.
  - Ascertain transaction purpose.
  - Enforce limits, licensing, documentation and reporting requirements.
- Crypto-specific impediments:
  - P2P transactions without intermediaries.
  - Unhosted wallets that obscure control and residency.
  - Pseudonymous on-chain transactions that complicate identity verification.
  - Cross-border operation of crypto service providers that are unregulated or outside national jurisdiction.
  - Lack of a common taxonomy leading to inconsistent regulatory coverage.
- Potential consequence: circumvention of CFMs, including both inflow- and outflow-targeted measures.
- Specific circumvention mechanisms:
  - On-ramp/off-ramp flows: convert local fiat to crypto, transfer cross-border, convert into foreign fiat and deposit to foreign bank accounts.
  - DeFi use cases: borrow stablecoins pegged to foreign fiat using tokenized local assets as collateral, bypassing CFMs that limit or tax foreign exchange borrowing and lending.
  - Mining-related outflows: Bitcoin mining revenues can monetize energy resources; monthly average of all Bitcoin mining revenues in 2021 was around $1.4 billion.

### Macrofinancial risks and “cryptoization”
- Continued crypto adoption could induce new macrofinancial risks, including “cryptoization.”
  - Crypto assets may be regarded as a new asset class with distinct return and risk characteristics, encouraging cross-border capital allocation.
  - If sustained, crypto asset growth could increase transmission of financial shocks globally and amplify global financial cycles.
  - Stablecoins and other crypto assets may replace local currency as medium of exchange, store of value, or unit of account in countries with high inflation and exchange rate volatility—this phenomenon is termed “cryptoization.”

### Empirical evidence (Appendix 2 summary: Model, data, and key findings)
- Model and data:
  - Regression equation: y_{i,t} = a1 x_{i,t–1} + B1 Z_{i,t–1} + η_i + μ_t + ε_{i,t}; period 2013 to 2019.
  - Two adoption proxies: (1) Trading volumes of Bitcoins in crypto exchanges; (2) Google search trends for the term Bitcoin.
  - Bitcoin chosen as dominant crypto asset with an "80 percent median market share" over the period of study.
  - Trading volumes data: Bitcoin transactions in local currencies in 56 exchanges operating in 47 countries (15 advanced economies and 32 EMDEs); transactions in dollars and euros dropped.
  - Google search trends: public interest for "Bitcoin" across 145 countries, scaled 0–100 relative to the United States benchmark.
- Main empirical results — trading volumes (Table A2.1):
  - FARI (capital account restrictions on outflows): coefficients reported as -0.8, -0.92, -0.86, 0.45, -0.76 (t-statistics shown in table); not consistently significant in primary specifications.
  - Chinn-Ito index (alternative): -1.34** (t = -2.49) in one specification.
  - Exchange rate (USD/LC) (log): -6.35**, -4.90*, -6.81**, -2.24, -16.75*** (t-statistics reported).
  - Foreign exchange volatility: -0.07, 2.47*** (t-statistics reported).
  - Inflation: 0.17*, 0.1, -0.16, 0.10, 0.09, 0.08 (t-statistics reported).
  - Share of population above 65: -16.46***, -14.78***, -15.12***, -14.86***, -23.29***, -6.48*** (t-statistics reported).
  - Remittances/GDP: 1.88* (t = 1.82) in one specification.
  - Adjusted R-squared: 0.80, 0.81, 0.81, 0.81, 0.84, 0.73 across specifications.
  - N: 344, 344, 334, 347, 199, 344.
  - Country FE: Yes in all specs; Year FE: Yes in most specs (one spec: No).
  - Significance notation: * p<0.10, ** p<0.05, *** p<0.001.
- Main empirical results — Google search trends (Table A2.2):
  - FARI: 0.02, -0.04, -0.04, 0.02, -0.31* (t = -1.85) across specifications; not significant in most specifications.
  - Chinn-Ito: 0.08 (t = 1.04) in one spec.
  - Exchange rate (USD/LC) (log): 0.15, 0.28, 0.11, -0.17, -7.32*** (t-statistics reported).
  - Foreign exchange volatility: -0.03**, 0.03 (t-statistics reported).
  - Inflation: 0.06**, 0.06*, 0.14**, 0.06*, 0.06*, -0.02 (t-statistics reported).
  - Share of population above 65: -2.14***, -2.22***, -2.25***, -2.28***, -1.75***, 3.41*** (t-statistics reported).
  - Remittances/GDP: -0.01 (t = -0.11) in one spec.
  - Adjusted R-squared: 0.85, 0.86, 0.86, 0.86, 0.84, 0.51 across specifications.
  - N: 946, 1081, 1054, 1067, 771, 1081.
  - Country FE: Yes in all specs; Year FE: Yes in most specs (one spec: No).
- Key empirical conclusions:
  - Capital account restrictions (FARI) are not consistently significant in main specifications using trading volumes or Google searches; alternative indices (Chinn-Ito) sometimes show a significant negative association.
  - Macroeconomic stress—especially currency depreciation, exchange rate volatility, and inflation—is associated with greater crypto adoption; currency depreciation shows particularly high significance and magnitude in trading-volume regressions.
  - Demographics: higher share of population above 65 is strongly and negatively associated with crypto adoption across specifications.
  - Remittances show a positive association with trading volumes in at least one specification, consistent with crypto’s role in cross-border payments/remittances.
  - Results robust across adoption proxies and subsamples, with some specification differences.

### Country-level drivers (selected examples by development group)
- Advanced economies:
  - US: high Bitcoin mining, trading, and DeFi activity; retail investors dominated; institutional flows from Bitcoin futures and Bitcoin ETF approvals increased mainstream participation.
  - UK: adoption driven by institutional investors and "whales" moving into DeFi; retail activity increased; most transactions involved Ethereum and wrapped Ethereum.
  - JAPAN: aging population cited as a major factor in relatively low adoption; regulatory uncertainty and past cyber incidents dampened demand.
  - KOREA: exchange restrictions make it difficult for foreigners to use Korea-based exchanges; Bitcoin commands a "kimchi premium".
- Emerging economies:
  - ARGENTINA: economic instability and foreign exchange restrictions drive adoption; miners relocated following China’s ban.
  - CHINA: between June and September 2021 all crypto-asset activities were banned and declared illegal; prior to the ban China was largest source of crypto mining.
  - RUSSIA: popularity driven by distrust of institutions, skilled programmers, fewer investment opportunities; tax avoidance reportedly contributed.
  - SOUTH AFRICA: exchange control regulations exist; crypto reportedly used to transfer funds abroad despite prohibitions on externalizing "any right to capital."
  - TURKEY: increased Bitcoin queries amid volatility and exchange rate depreciation in late 2019.
  - NIGERIA: exchange restrictions, MCPs, and CFMs; crypto used in cross-border payments/remittances; central bank prohibits commercial banks from dealing with crypto firms.
  - INDIA: market dominated by young investors and tech talent; stricter regulations on centralized exchanges boosted DeFi usage.
- Developing economies:
  - AFGHANISTAN: Taliban takeover reportedly fueled a surge in crypto use, rising into the top 20 in Chainalysis ranking.
  - IRAN: recognized crypto mining as an industry; licensed miners supply mined crypto to government to fund imports.
  - VENEZUELA: hyperinflation and sanctions led to crypto hedging; leads the region in P2P activity and corporate acceptance for remittances.

### Policy and regulatory considerations — strategic directions and recommendations
- CFMs design principles (Institutional View and practice):
  - CFMs should be temporary, transparent, and seek to avoid discrimination based on residency.
  - The least discriminatory effective measure should be preferred.
  - CFMs on capital inflows should be targeted; CFMs on capital outflows may need to be comprehensive to prevent circumvention.
  - Ongoing evaluation of economic usefulness versus costs; phase out as pressures abate and policy space is rebuilt.
- Strategies to preserve effectiveness of CFMs in a crypto environment:
  - Develop a comprehensive, consistent, and coordinated regulatory approach to crypto assets and apply it effectively to CFMs.
  - Establish international collaborative arrangements for implementation.
  - Address data gaps and leverage regtech and suptech for timely risk monitoring.
  - Strike a balance between ex ante approval and ex post monitoring and enforcement.
- Strengthening legal and regulatory frameworks (key actions):
  - Clarify legal status of crypto assets, the perimeter of permissible activities, and mandates of regulatory bodies.
  - Review and amend foreign exchange and CFM laws to cover crypto assets where necessary.
  - Develop a consistent taxonomy of crypto assets.
  - Tailor regulatory requirements to main use cases; adopt a risk-based, cross-sectoral approach.
  - Establish effective coordination mechanisms among overseers and set up licensing regimes for crypto service providers.
  - Provide clear guidance to regulated financial institutions on exposure to crypto assets (capital and liquidity requirements, exposure limits, investor suitability).
  - Consider entry points for DeFi and P2P transactions (stakeholder governance groups, code-level compliance, public-private collaboration).
- Financial integrity and AML/CFT:
  - Consistent implementation of FATF standards for virtual assets and VASPs is key.
  - FATF measures include CDD, record keeping, transaction monitoring, and suspicious transaction reporting.
  - Parties with control or influence in DeFi arrangements qualify as VASPs and should be subject to AML/CFT regulation; FATF standards do not apply directly to P2P transactions.
- Cross-border and enforcement considerations:
  - Borderless nature of crypto-assets enables regulatory arbitrage; international collaboration and information sharing are required.
  - Mechanisms may be needed for domestic authorities to authorize and regulate crypto service providers legally domiciled abroad.
  - Recent regulatory actions against Binance in multiple jurisdictions suggest possible regulatory control over unauthorized overseas providers but enforcement may be challenging.
  - Existing cooperation protocols (bilateral MoUs, multilateral MoUs, supervisory colleges) could be adapted for CFM implementation.
- Leveraging regtech and suptech:
  - Regtech supports identity management, transaction monitoring, and automated identification of noncompliant transactions.
  - Suptech helps supervisors assess compliance by financial firms.
  - Advanced analytics and AI models can be adapted for payment transaction monitoring and CFM-specific anomaly detection.
  - FATF “travel rule” can provide basic infrastructure for data collection when implemented; legal changes may be needed to allow AML/CFT-collected information to be used for CFM enforcement.
  - Blockchain analysis faces limits: geolocation, geo-blockers (VPNs), second-layer protocols, off-chain transactions, DEXs, privacy tokens, and unhosted wallets.
  - Red-flag indicators: structuring transactions below thresholds; simultaneous transfers to multiple service providers; multiple accounts without business rationale; use of privacy coins, mixers, tumblers.
  - Data capability building: concerted effort needed to improve availability, quality, and consistency of data; current crypto transaction data often unreliable, incomplete, or fragmented.

### Conclusions and implementation caveats
- Key findings:
  - Crypto assets have grown considerably; adoption driven by technological, macroeconomic, institutional, and demographic factors and could be sustained.
  - Econometric analysis confirms macroeconomic and demographic factors' importance; crypto assets have served as a perceived hedge against exchange rate and inflation risks and are more appealing in younger-population countries.
  - Crypto assets pose significant macrofinancial risks, including for implementation of CFMs: decentralized, borderless, pseudonymous characteristics make them attractive for circumvention.
  - Gaps in legal and regulatory frameworks leave key crypto activities and service providers outside the regulatory perimeter; coordination and information sharing among authorities are lacking.
- Recommended policy strategy elements:
  - Devise a comprehensive, consistent, and coordinated regulatory approach and apply it effectively to CFMs.
  - Establish international collaborative arrangements for implementation.
  - Address data gaps and leverage regtech and suptech to create anomaly-detection models and red-flag indicators.
  - Strike the right balance between ex ante approval and ex post monitoring and enforcement.
  - Prioritize fit-for-purpose legal and regulatory framework: clarify legal status, develop consistent taxonomy, bring service providers under regulatory umbrella, implement AML/CFT standards, develop mechanisms to regulate providers domiciled abroad.
  - Use regulated financial intermediaries and service providers as gatekeepers between traditional finance and the crypto ecosystem; ensure their compliance.
  - Consider regulation for DeFi platforms and P2P transactions via stakeholder governance groups and code-level measures.
- Implementation caveats:
  - Challenges will likely persist—especially in EMDEs with regulatory and technological capacity constraints.
  - Some crypto activities may go underground or adopt innovations to circumvent regulatory actions.
  - Nonetheless, comprehensive legal and regulatory frameworks and consistent implementation can promote regulatory-compliant innovations while addressing bad-faith actors.

*Source: ftnea2022005 - Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries (PDF chapter content).*

### Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . . . .

### Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries

### I. Introduction and scope
- Purpose: analyze how crypto assets could impact capital flow management measures (CFMs) from a structural and longer-term perspective and identify possible policy responses and strategies.
- Focus: preserve authorities’ preferences about exchange regimes and capital account management; does not advocate for or against CFMs.
- Related work: companion paper tentatively titled “Capital Flow Management Measures in the Digital Age (II): Design Choices of CBDC” is mentioned as forthcoming.

### Key statistics and market scale
- Global market size of crypto assets: $2–$3 trillion.
- Crypto assets represent about 1 percent of total market value of financial assets.
- Stablecoins have gained market share since 2020; trading of US dollar–linked stablecoins vis-à-vis some emerging market and developing economy currencies has soared since 2020 (Aramonte, Huang, and Schrimpf 2022).
- DeFi has grown into a multibillion-dollar industry.
- Top 20 countries with highest “intensity of crypto adoption” are mostly emerging market and developing economies from Asia, Latin America, and sub-Saharan Africa; the United States is the only advanced economy in the group (Chainalysis 2021).
- FARI (Financial Account Restrictiveness Index) findings: more than 90 percent of IMF member countries had some types of restrictions on capital flows in place at the end of 2019; out of those, 21 countries had extensive restrictions in place.

### Drivers of crypto-asset adoption (summary)
- Macrofinancial drivers:
  - Volatile macroeconomic conditions (currency depreciation, high inflation) tend to boost crypto-asset adoption (empirical evidence from a panel regression model; Appendix 2).
  - Desire to hedge against macrofinancial risks in economies with weaker fundamentals.
- Institutional and regulatory drivers:
  - Gaps in regulation, lack of a common and consistent taxonomy of crypto assets, and cross-border operation of many crypto service providers make supervision and enforcement by national authorities more difficult.
  - CFMs often rely on intermediaries to verify transaction nature and counterparties’ identities; P2P trading and unhosted wallets undermine that verification.
- Demographic and behavioral drivers:
  - Younger population age structure tends to boost crypto-asset adoption.
  - Ease of payments with cryptos, perceived anonymity, novelty and lure of crypto assets—particularly among the young—drive adoption.
- Structural and market-structure drivers:
  - Retail investors have been important drivers of adoption; institutional investors and corporations contributed notably to the 2020–21 rally in advanced economies in North America and Europe (J.P. Morgan 2022).
  - Market structure changes: rise in stablecoins and growth of DeFi.

### Crypto-assets ecosystem (Box 1 highlights)
- Definition: privately issued digital assets that depend primarily on cryptography and distributed ledgers (blockchains).
- Types:
  - Earlier crypto assets (e.g., Bitcoin): issued in their own denomination, not a liability of any entity.
  - Stablecoins: designed to maintain a stable value relative to a specific asset or pool of assets via reserves and sometimes algorithms.
- Functional entities: exchanges, wallet providers, miners, stablecoin issuers and custodians.
- On-chain vs off-chain:
  - On-chain: actions executed through the blockchain; public but pseudonymous on public blockchains.
  - Off-chain: actions not executed through the blockchain itself but handled by a network participant (for example, an exchange).
- Centralized vs decentralized:
  - Centralized entities: legally incorporated, act as intermediaries, rely on private records (off-chain).
  - Decentralized entities: depend primarily on code executed on-chain (DeFi platforms, smart contracts), often without legal incorporation.
- Wallet types: hot vs cold; hosted (custodial) vs unhosted (noncustodial). Unhosted wallets can make it difficult or impossible to determine who controls assets and the residency of transacting parties.
- Exchanges: most large crypto exchanges are centralized and serve as on- and off-ramps for sovereign currencies; peer-to-peer (P2P) transactions occur without intermediaries.

### How crypto assets challenge CFMs (mechanisms)
- CFMs implementation typically requires intermediaries to:
  - Verify identities/residency of counterparties.
  - Ascertain transaction purpose.
  - Enforce limits, licensing, documentation and reporting requirements.
- Crypto-specific impediments:
  - P2P transactions without intermediaries.
  - Unhosted wallets that obscure control and residency.
  - Pseudonymous on-chain transactions that complicate identity verification.
  - Cross-border operation of crypto service providers that are unregulated or outside national jurisdiction.
  - Lack of a common taxonomy leading to inconsistent regulatory coverage.
- Potential consequence: circumvention of CFMs, including both inflow- and outflow-targeted measures.

### Macrofinancial risks and “cryptoization”
- Continued crypto adoption could induce new macrofinancial risks, including “cryptoization.”
  - Crypto assets may be regarded as a new asset class with distinct return and risk characteristics, encouraging cross-border capital allocation.
  - If sustained, crypto asset growth could increase transmission of financial shocks globally and amplify global financial cycles (IMF 2020a).
  - Stablecoins and other crypto assets may replace local currency as medium of exchange, store of value, or unit of account in countries with high inflation and exchange rate volatility—this phenomenon is termed “cryptoization” (IMF 2021).

### Empirical findings (summary from Appendix 2 and referenced analyses)
- Panel regression results confirm macroeconomic and demographic factors as important drivers of crypto adoption.
- Volatile macroeconomic conditions and a younger population age structure are positively associated with higher crypto-asset adoption.
- Appendix 2 includes Tables A2.1 and A2.2 on drivers using proxies: Trading Volumes and Google Search Trends.

### Policy and regulatory considerations (strategic directions)
- CFMs design principles (from the Institutional View and practice):
  - CFMs should be temporary, transparent, and seek to avoid discrimination based on residency.
  - The least discriminatory effective measure should be preferred.
  - CFMs on capital inflows should be targeted; CFMs on capital outflows may need to be comprehensive to prevent circumvention.
  - Ongoing evaluation of economic usefulness versus costs; phase out as pressures abate and policy space is rebuilt.
- Challenges to address in the digital age:
  - Adapt CFMs to account for crypto assets’ pseudonymity, P2P trading, and cross-border, often decentralized service providers.
  - Close collaboration among domestic authorities and international cooperation, especially if central bank digital currencies (CBDCs) are considered.
- Central bank considerations:
  - To maintain attractiveness of central bank money, central banks should continue to run effective monetary policy and strengthen monetary policy frameworks (IMF 2020a).
  - CBDCs could be designed to facilitate implementation of CFMs and make cross-border payments more efficient, but require close collaboration between issuing central bank and foreign central banks and relevant authorities.

*Source: ftnea2022005 - Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries (PDF chapter content).*

### BOX 2. Types of CFMs and Their Objectives

### BOX 2. Types of CFMs and Their Objectives

### Types of CFMs
- Residency-based CFMs: measures that set limits and restrictions on transactions between residents and nonresidents, such as asset (for example, residential property) sales to nonresidents, or on residents opening foreign bank accounts or making investments overseas.
- Administrative or direct restrictions: outright prohibitions or limits on, or an (often discretionary) approval procedure for cross-border transactions.
- Indirect or market-based restrictions: examples include reserve requirements and taxes that discourage capital flows by making them more costly.

### Objectives and Applications of CFMs
- Aggregate-level inflow measures:
  - Aim to limit the volume of capital inflows during inflow surges to avoid overwhelming the economy’s capacity to productively absorb the flows and to safeguard macroeconomic and financial stability.
- Sectoral CFMs:
  - Applied to specific sectors (for example, housing) where surges in capital inflows can create financial vulnerabilities even if aggregate flows do not immediately cause stability concerns.
- Outflow CFMs in crisis contexts:
  - Typically temporary measures introduced in crisis, near-crisis, or imminent crisis circumstances to preserve reserves and attenuate exchange rate pressures.
- Longer-term CFMs:
  - In some cases, CFMs may be applied for a longer period to offer breathing room while appropriate macroeconomic adjustments are undertaken.

### How Crypto Assets Can Challenge and Circumvent CFMs
- Legal and regulatory coverage gaps:
  - Crypto assets often have ambiguous legal status and may operate in a regulatory vacuum, so they may not be covered by existing foreign exchange and CFM laws and regulations.
  - Regulatory authorities may not have clearly defined mandates and powers to control the use of crypto assets.
  - Under International Financial Reporting Standards, crypto assets are classified as nonfinancial assets; IMF statistics currently classify unbacked crypto assets as nonfinancial assets given their lack of counterparty liability. In some circumstances this classification could put crypto assets outside the mandate of authorities responsible for enforcing CFMs if those mandates cover only financial assets.
  - Crypto assets are rarely regarded as legal tender globally and are often not covered by the definition of foreign currency for foreign exchange laws and regulations.
- Identity, residency, and data limitations:
  - Identities and residency of crypto asset holders or end users are not easily known, making prosecution or sanctioning for violations difficult.
  - Available data on crypto assets are inadequate for countries to monitor transactions relevant for CFMs; public third-party aggregated data lack the granular, transaction-level detail needed for CFM purposes.
  - There is no reliable way to estimate the stock or flow of crypto assets based on country residency of holder.
  - The lack of a physical location of crypto-asset ledgers complicates determining residency of transacting parties and applicable laws.
- Intermediary and enforcement challenges:
  - Crypto-asset trades may not involve intermediaries or service providers who can be held responsible to comply with foreign exchange and CFM laws and to verify identities.
  - Decentralization of the crypto ecosystem affects enforceability: the more decentralized, the more difficult it is to regulate (Figure 3 notion).
  - Crypto exchanges and other service providers are not subject to consistent licensing regimes globally, potentially leading to regulatory arbitrage.
  - Many service providers operate across borders and may be headquartered in jurisdictions with favorable regulatory, tax, and legal frameworks, compromising local authorities’ ability to enforce CFMs.
- Anonymity and privacy-enhancing features:
  - Crypto assets exist on a spectrum of anonymity and privacy; Bitcoin is pseudonymous, while assets such as Zcash and Monero offer enhanced anonymity by concealing identities and transaction values.
  - Privacy techniques (VPN, Tor, browser privacy settings), mixers, layering, and technologies like the Lightning Network can significantly reduce traceability of transactions.
  - Mixers shuffle funds from addresses A1, A2, A3 into new addresses A4, A5, A6, making external observers unable to link new addresses to prior owners (illustrated in Figure 4).
- Specific circumvention mechanisms and examples:
  - On-ramp/off-ramp flows:
    - A user exchanges local fiat into a crypto asset (e.g., Bitcoin or a stablecoin denominated in a foreign reserve currency) via digital wallets and exchanges, transfers the crypto asset across borders, then exchanges it into foreign fiat (for example, US dollar) using local or global exchanges; proceeds can be deposited to a foreign bank account or invested in other assets.
    - Crypto exchanges may use conventional bank accounts, mobile money accounts, or stablecoins to handle local currency proceeds, and central banks or foreign exchange regulators may lack the power or information to block such account services.
  - DeFi use cases:
    - DeFi platforms can replicate foreign exchange borrowing exposure by allowing users to borrow a stablecoin pegged to a foreign fiat currency using tokenized local assets as collateral, potentially bypassing CFMs that limit or tax foreign exchange borrowing and lending.
    - DeFi often charges substantially lower margins than traditional institutions, attracting users when local-currency interest rates are much higher than international rates.
    - DeFi is subject to significant market and liquidity risks; forced liquidations during high market volatility can lead to volatile capital flows and exacerbate exchange rate pressures.
  - Mining-related outflows:
    - Mining for energy-intensive blockchains such as Bitcoin can monetize energy resources; Bitcoin rewards and fees paid to miners could be a source of capital outflow.
    - Monthly average of all Bitcoin mining revenues in 2021 was around $1.4 billion.

### Regulatory and Practical Implications
- Decentralization implications:
  - Decentralization relates to governance of crypto creation/destruction, roles of service providers (exchanges, custodians), and the borderless nature of DLT networks.
  - Decentralization influences the amount of identity and transaction metadata available to network participants, the public, or authorities.
- Treatment and jurisdictional examples:
  - A few jurisdictions (for example, EU, Japan, and Singapore) have issued or proposed bespoke regulations for crypto assets; most other jurisdictions have responses limited to warnings, prohibitions on banks providing crypto services, application of existing regulations to selected ecosystem segments, or outright bans.
  - Among major EMDEs, Argentina and South Africa explicitly cite CFMs as objectives of crypto-asset regulation.
  - South Africa’s Exchange Control Regulation 10(1)(c) prohibits transactions where capital or the right to capital is, without permission from National Treasury, directly or indirectly exported from South Africa; this includes transactions where individuals purchase crypto assets in South Africa and use them to externalize “any right to capital.”
- Enforcement challenges:
  - When unhosted wallets, DEXs, and decentralized apps are used, prescribing and enforcing reporting and verification requirements is difficult because no third-party provider is holding assets on behalf of clients.
  - Differences in national approaches and regulatory gaps for crypto-asset service providers can lead to regulatory arbitrage and hinder CFM enforcement.

*Source: IMF staff.*

### 2. Exchange local fiat

### 2. Exchange local fiat currency to crypto asset

### Process steps
- 1. “On-ramp”: Connect cryptoexchangeto user A’s bank account. Transfer fiat to exchangeaccount.
- 3a.Transfer crypto asset to an identified wallet address (consumerdue  diligence)
- 5. “Off-ramp”: Transfer fiat from userB’s exchange account to her bank account.

### Actors / entities shown
- Crypto    exchange
- Crypto    exchange

*ftnea2022005 - 2. Exchange local fiat*

### 4. Exchange crypto asset

### 4. Exchange crypto asset

### IV. Strategies to Preserve the Effectiveness of CFMs
- Policymakers need a multifaceted strategy to preserve the effectiveness of CFMs in an environment of growing crypto-asset use. Essential elements include:
  - developing a comprehensive, consistent, and coordinated regulatory approach to crypto assets19 and applying it effectively to CFMs;
  - establishing international collaborative arrangements for implementation;
  - addressing data gaps and leveraging technology (regtech and suptech) to allow for timely risk monitoring; and
  - striking a good balance between ex ante and ex post enforcement.

### A. Strengthening Legal and Regulatory Frameworks
- Objectives and key actions:
  - Clarify the legal status of various crypto assets, the perimeter of permissible activities, and mandates of regulatory bodies to ensure all relevant segments of the crypto ecosystem are captured.
  - Review and amend foreign exchange and CFM laws and regulations, if necessary, to cover crypto assets—even if they are not classified as financial assets or foreign currency.
  - Develop a consistent taxonomy of crypto assets to promote coherent legal and regulatory frameworks and comparable data across jurisdictions.
  - Tailor regulatory requirements to the main use cases of crypto assets; adopt a risk-based, cross-sectoral approach so similar products are regulated similarly across countries.
    - Example allocation of oversight responsibilities: crypto services/products for investments → securities regulator; crypto services/products for payments → central bank or payments oversight authority.
  - Establish effective coordination mechanisms among overseers (central banks, securities and banking regulators) to address risks from different use cases.
  - Set up a licensing regime for crypto service providers; bring crypto-asset exchanges and wallet providers offering fiat-to-crypto on- and off-ramps into the regulatory umbrella with equivalent frameworks to fiat currencies.
  - Provide clear guidance to regulated financial institutions on exposure to and engagement with crypto assets, including capital and liquidity requirements, limits on exposure, and investor suitability and risk assessments.21
  - Apply rules developed for existing financial service providers proportionately to entities engaged in crypto-asset services; clearly articulate licensing criteria, reporting requirements, designated authorities for licensing and oversight, coordination mechanisms, and sanctions for noncompliance.
  - Consider entry points and approaches for DeFi and P2P transactions: groups of stakeholders that take and implement decisions on DeFi platforms and governance protocols are natural regulator entry points; code-level compliance and public-private collaboration may be necessary.
- Financial integrity and AML/CFT:
  - Consistent and effective implementation of FATF standards for virtual assets and virtual asset service providers (VASPs)20 is key to mitigating financial integrity risks that might give rise to illicit capital flows.
  - FATF measures include requirements on VASPs related to customer due diligence (CDD), record keeping, transaction monitoring, and reporting of suspicious transactions.
  - Parties who maintain control or sufficient influence in DeFi arrangements qualify as VASPs and should be subject to AML/CFT regulation.
  - FATF standards do not apply directly to P2P transactions; risks in P2P contexts should nevertheless be monitored and mitigated.
- Cross-border and enforcement considerations:
  - The borderless nature of crypto-assets limits the effectiveness of national approaches; crypto-asset service providers can register in regulatory-friendly locations, creating regulatory arbitrage.
  - International collaboration and information sharing are required to minimize regulatory arbitrage and ensure continued effectiveness of CFMs.
  - Mechanisms may be needed for domestic authorities to authorize and regulate crypto service providers legally domiciled in foreign jurisdictions. Under FATF recommendations, VASPs should be registered or licensed at least in the jurisdiction where they are created or where the place of business is located and supervised for AML/CFT purposes.
  - Recent regulatory actions against Binance in Canada, Italy, Japan, Lithuania, Singapore, Thailand, and the UK suggest possible regulatory control over unauthorized overseas providers, but enforcement may be challenging for regulators with capacity or technological constraints.22
  - Existing cooperation protocols (bilateral MoUs, multilateral MoUs, supervisory colleges) could be adapted for CFM implementation; additional collaborative arrangements for CFM purposes may be necessary.23

### B. Leveraging Regtech and Suptech for CFM
- Regtech and suptech applications:
  - Regtech solutions can support identity management, transaction monitoring, gathering and analyzing customer and transaction data, and automated identification of noncompliant transactions.24
  - Suptech tools can be used by supervisors to assess compliance by financial firms.
  - Advanced analytics and artificial intelligence models used for forecasting and automating backoffice operations can be adapted for payment transaction monitoring and CFM-specific anomaly detection (FSB 2020).25
- Data and identity:
  - Data on the identity of wallet owners can enhance regtech and suptech effectiveness; most blockchains are pseudonymous, so real-world identities may not be known unless CDD has been carried out by service providers.
  - The FATF “travel rule” requires part of the information on originator and beneficiary to “accompany” assets transferred between two VASPs; jurisdictions implementing AML/CFT measures would have basic infrastructure for collecting data and monitoring transactions.
  - Information collected for AML/CFT purposes may not be allowed to be used, or may be unsuitable, for CFM implementation without legal changes.
- Blockchain analysis and analytics challenges:
  - Blockchain analysis can link certain wallets and detect illicit transactions but faces challenges: geolocation, geo-blockers (VPNs), second-layer protocols (Lightning Network), off-chain transactions (within centralized exchanges), DEXs, privacy tokens, and unhosted wallets.
  - DEXs are distributed open-source platforms without intermediaries; developers and governance protocols are focus points for regulatory compliance programmed into code, and measures could include ex ante guidelines or ex post code reviews and audits.
- Anomaly detection and red flags:
  - Regulators can adapt FATF anomaly-detection models and red-flag indicators for CFM monitoring. Red flags include:
    - structuring transactions in small amounts below thresholds;
    - simultaneously transferring crypto assets to multiple service providers (especially those in other jurisdictions);
    - using multiple accounts without logical business explanation;
    - creating separate accounts under different names;
    - using privacy coins or mixers and tumblers.
  - CFM-specific anomaly detection could focus on large volumes of cross-border P2P transactions exceeding allowed capital flows or tracking multiple senders and recipients.
- Data capability building:
  - A concerted effort is needed to develop data capabilities and strengthen availability, quality, and consistency of data.
  - Current crypto transaction data is often unreliable, incomplete, or fragmented; data sharing by issuers, wallets, and exchanges is mostly voluntary and lacks uniformity (IMF 2021).
  - Jurisdictions typically require data reporting by crypto-asset service providers for AML/CFT purposes only; authorities could augment data with blockchain analytics and private-sector work.
  - Cross-border cooperation is critical to share relevant data between home and host jurisdictions.

### V. Conclusions
- Key findings:
  - Crypto assets have grown considerably in the past decade; adoption has been driven by technological, macroeconomic, institutional, and demographic factors and could be sustained.
  - Econometric analysis confirms the relative importance of macroeconomic and demographic factors in driving crypto-asset adoption; crypto assets have served as a perceived hedging instrument against exchange rate and inflation risks—particularly in countries with weaker economic fundamentals—and are more appealing to countries with younger populations.
  - Crypto assets pose significant macro-financial risks, including for the implementation of CFMs. Their decentralized, borderless, and pseudonymous characteristics make them potentially attractive instruments to circumvent CFMs.
  - Gaps in legal and regulatory frameworks leave key crypto activities and service providers outside the regulatory perimeter; existing foreign exchange and CFM laws typically do not cover crypto assets; coordination and information sharing among authorities are lacking.
- Recommended policy strategy elements:
  - Devise a comprehensive, consistent, and coordinated regulatory approach to crypto assets and apply it effectively to CFMs.
  - Establish international collaborative arrangements for implementation.
  - Address data gaps and leverage regtech and suptech to create anomaly-detection models and red-flag indicators for timely risk monitoring.
  - Strike the right balance between ex ante approval and ex post monitoring and enforcement.
  - Prioritize a fit-for-purpose legal and regulatory framework: clarify legal status of crypto assets; develop a consistent taxonomy; bring crypto-asset service providers under regulatory umbrella; implement AML/CFT standards; develop mechanisms to regulate and supervise service providers domiciled outside the jurisdictions where services are provided.
  - Use regulated financial intermediaries and service providers as gatekeepers between traditional finance and the crypto ecosystem; ensure their compliance.
  - Further consider regulation for DeFi platforms and P2P transactions via stakeholder governance groups and code-level measures.
- Implementation caveats:
  - Even with a multifaceted strategy, challenges will likely persist—especially in emerging market and developing economies with regulatory and technological capacity constraints.
  - Some crypto activities may go underground or adopt innovations to circumvent regulatory actions.
  - Nonetheless, a comprehensive legal and regulatory framework and consistent implementation can promote law-abiding, regulatory-compliant innovations while providing mechanisms to address bad-faith actors and criminals.

*International Monetary Fund — Fintech Note ftnea2022005, “4. Exchange crypto asset”*

### Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries

### Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries

### Country-level drivers (by development group)

- Advanced economies
  - US: "Bitcoin mining, trading, and DeFi transactions in the US are among the highest in the world." Retail investors dominated; institutional investors searching for yield amid low interest rates contributed to price rallies. Launch of Bitcoin futures (including at the Chicago Board Options Exchange and Chicago Mercantile exchange) and approval of the Bitcoin ETF increased mainstream participation; well-developed financial infrastructure facilitates trading.
  - UK: Adoption largely driven by institutional investors and "whales" moving into DeFi; retail activity increased. Most transactions involved Ethereum and wrapped Ethereum used in DeFi protocols.
  - JAPAN: Aging population cited as a major factor in the relatively low level of crypto adoption. Regulatory uncertainty and history of cyber incidents (e.g., Coincheck hack in 2018) dampened demand.
  - KOREA: Exchange restrictions (in accordance with UN Security Council Resolutions) make it difficult for foreigners to use Korea-based crypto exchanges. Bitcoin commands a steep "kimchi premium" in Korea; demand remains strong despite the premium.

- Emerging economies
  - ARGENTINA: Economic instability and foreign exchange restrictions are major drivers. China’s ban on crypto mining led miners to Argentina to leverage low energy prices. Return of exchange controls amid high inflation and exchange rate depreciation increased demand and caused Bitcoin to sell at a premium.
  - CHINA: Exchange controls apply to most capital transactions. Between June and September 2021 all crypto-asset activities were banned and declared illegal. Prior to the ban China was the largest source of crypto mining; Chinese residents were active in trading—reportedly for speculative investment purposes and potentially to circumvent capital outflow CFMs.
  - RUSSIA: Popularity partly due to distrust of institutions, large populations of skilled computer programmers, and fewer economic/investment opportunities. Tax avoidance reportedly driven adoption. Recent international sanctions and wide-ranging capital controls could reinforce the trend.
  - SOUTH AFRICA: Maintains exchange control regulations. Many residents reportedly used crypto assets to transfer funds abroad, though regulations prohibit using crypto to externalize "any right to capital" and repatriation of value via crypto is not permitted as part of discretionary/foreign capital allowances because cross-border "flow" of crypto is not recorded/efficiently monitored.
  - TURKEY: Bitcoin queries and adoption increased amid volatility and exchange rate depreciation in late 2019; CFMs used to varying degrees to contain capital flight.
  - NIGERIA: Exchange restrictions (administrative controls on FX allocation), multiple currency practices (MCPs), and CFMs. Crypto used in cross-border payments and remittances to hedge inflation/exchange rate depreciation. Central bank prohibits commercial banks from dealing with crypto firms, but firms reportedly use third-party accounts as workarounds.
  - INDIA: Market dominated by young investors with appetite for risk and innovation. Availability of tech talent boosted adoption. Stricter regulations on centralized exchanges boosted usage of innovative projects like DeFi protocols.

- Developing economies
  - AFGHANISTAN: Taliban takeover reportedly fueled a surge in crypto use, propelling the country into the top 20 of the 154 countries ranked in the 2021 Global Crypto Adoption Index of Chainalysis.
  - IRAN: Subject to US sanctions including trade embargoes on oil sales. Iran officially recognized crypto mining as an industry and amended regulations to allow Bitcoin and other crypto assets to be mined officially under government control and supplied to the government to fund imports. The central bank reportedly will allow licensed banks and moneychangers to pay for imports with crypto assets mined by officially sanctioned miners.
  - VENEZUELA: Suffers hyperinflation and is subject to US sanctions. Authorities introduced MCPs, exchange restrictions, and CFMs; Venezuelans turned to crypto to hedge. Venezuela leads the region in P2P activity; many companies accept Bitcoin and diaspora use crypto for remittances.

_Values and characterizations above are drawn verbatim from the source text._

*Sources: Staff summary based on Chainalysis (2021); IMF’s Taxonomy of Capital Flow Management Measures (IMF 2020b); and individual IMF Country Reports.*

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### Appendix 2. Empirical Analysis of the Drivers of Crypto Adoption

### Model specification and approach

- Regression equation:
  - y_{i,t} = a1 x_{i,t–1} + B1 Z_{i,t–1} + η_i + μ_t + ε_{i,t}
  - y: proxy for crypto adoption
  - x: proxy for capital account restrictions
  - Z: vector of macroeconomic and structural variables
  - η_i and μ_t: country and year fixed effects
- Two adoption proxies used:
  - (1) Trading volumes of Bitcoins in crypto exchanges
  - (2) Google search trends for the term Bitcoin
- Rationale: Bitcoin chosen as dominant crypto asset with an "80 percent median market share" over the period of study.

### Sample, data sources, and limitations

- Period: 2013 to 2019.
- Trading volumes data:
  - Represent Bitcoin transactions in local currencies in 56 major global and local crypto exchanges operating in 47 countries (15 advanced economies and 32 emerging market and developing economies).
  - Transactions in dollars and euros are dropped due to international status of these currencies.
  - Limitations: direction of trade not observed; higher volumes may not tightly link to adoption; trading pairs can be quoted in several exchanges leading to double counting.
- Google search trends:
  - Public interest measure from Google searches for "Bitcoin" across 145 countries, scaled 0–100 relative to the United States benchmark.
- Explanatory variables include:
  - Financial Account Restrictiveness Index (FARI) with data from the IMF AREAER, focus on restrictions on outflows.
  - Macroeconomic controls: inflation, exchange rate movements (appreciation/depreciation), exchange rate volatility (from IMF International Financial Statistics).
  - Structural indicators: mobile cellular subscriptions per 100 people, secure internet servers per 1 million people, share of population above 65, remittances received (percent of GDP) (World Bank data).

### Main empirical results — trading volumes (Table A2.1)

- General findings:
  - The coefficient on the FARI for outflows is not significant in primary specifications, possibly reflecting measurement issues with trading volumes or limited effect of CFMs on crypto transactions.
  - Using alternative measures (Chinn-Ito index) yields a significant negative coefficient, suggesting more restrictive capital accounts may be associated with less crypto adoption in some specifications.
  - Macroeconomic conditions—currency depreciation, exchange rate volatility, and inflation—are important drivers; currency depreciation displays the highest significance levels and largest magnitudes.
  - Demographics matter strongly: higher share of population over age 65 is associated with less Bitcoin trading. ICT indicators (mobile subscriptions, secure internet servers) are not significant.
  - Remittances appear to be positively associated with adoption in some specifications, suggesting a role for crypto in cross-border payments/remittances.

- Selected coefficient estimates and statistics (dependent variable: ln(trading volumes)):
  - Capital account restrictions on outflows (FARI): -0.8, -0.92, -0.86, 0.45, -0.76 (t-statistics shown in table).
  - Capital account restrictions on outflows (Chinn-Ito): -1.34** (t = -2.49).
  - Exchange rate (USD/LC) (log): -6.35**, -4.90*, -6.81**, -2.24, -16.75*** (t-statistics reported).
  - Foreign exchange volatility: -0.07, 2.47*** (t-statistics reported).
  - Inflation: 0.17*, 0.1, -0.16, 0.10, 0.09, 0.08 (t-statistics reported).
  - Share of population above 65: -16.46***, -14.78***, -15.12***, -14.86***, -23.29***, -6.48*** (t-statistics reported).
  - Remittances/GDP: 1.88* (t = 1.82) in one specification.
  - Constants and model fit:
    - Adjusted R-squared: 0.80, 0.81, 0.81, 0.81, 0.84, 0.73 across specifications.
    - N: 344, 344, 334, 347, 199, 344 (country sample: All; Emerging/Developing indicated in one spec).
    - Country FE: Yes in all specs; Year FE: Yes in most specs (one spec: No).
  - Notes: t-statistics in parentheses in the original table; significance levels: * p<0.10, ** p<0.05, *** p<0.001.

### Main empirical results — Google search trends (Table A2.2)

- General findings:
  - Results using Google search trends broadly confirm trading-volume findings.
  - Indicator of capital account restrictions (FARI) is not significant in most specifications; one specification shows FARI = -0.31* (t = -1.85).
  - Demographics remain key: share of population above 65 is strongly negatively associated with Bitcoin-related searches in most specifications.
  - Macroeconomic conditions matter; in this specification set inflation plays a more prominent role than exchange rate movements.
  - Results robust to inclusion of autoregressive terms and to different capital-account restriction indices.

- Selected coefficient estimates and statistics (dependent variable: ln(Google searches)):
  - Capital account restrictions on outflows (FARI): 0.02, -0.04, -0.04, 0.02, -0.31* (t = -1.85) across specifications.
  - Capital account restrictions on outflows (Chinn-Ito): 0.08 (t = 1.04) in one spec.
  - Exchange rate (USD/LC) (log): 0.15, 0.28, 0.11, -0.17, -7.32*** (t-statistics reported).
  - Foreign exchange volatility: -0.03**, 0.03 (t-statistics reported).
  - Inflation: 0.06**, 0.06*, 0.14**, 0.06*, 0.06*, -0.02 (t-statistics reported).
  - Share of population above 65: -2.14***, -2.22***, -2.25***, -2.28***, -1.75***, 3.41*** (t-statistics reported; one specification with positive coefficient noted).
  - Remittances/GDP: -0.01 (t = -0.11) in one spec.
  - Constants and model fit:
    - Adjusted R-squared: 0.85, 0.86, 0.86, 0.86, 0.84, 0.51 across specifications.
    - N: 946, 1081, 1054, 1067, 771, 1081 (country sample: All; Emerging/Developing indicated in one spec).
    - Country FE: Yes in all specs; Year FE: Yes in most specs (one spec: No).
  - Notes: All explanatory variables standardized in regressions; t-statistics in parentheses; significance levels as in Table A2.1.

### Key empirical conclusions

- Capital account restrictions (as measured by FARI) are not consistently significant in the main specifications using trading volumes or Google searches, though alternative indices (Chinn-Ito) sometimes show a significant negative association.
- Macroeconomic stress—especially currency depreciation, exchange rate volatility, and inflation—is associated with greater crypto adoption, with currency depreciation showing particularly high significance and magnitude in trading-volume regressions.
- Demographics: higher share of population aged above 65 is strongly and negatively associated with crypto adoption across specifications.
- Remittances show a positive association with trading volumes in at least one specification, consistent with crypto assets functioning as faster/cheaper cross-border payment solutions.
- Results are robust across alternative adoption proxies (trading volumes and Google searches) and across subsamples (emerging/developing), with some differences (e.g., exchange rate volatility significance in EM/DE subsample).

*Staff analysis based on empirical results reported in the source tables.*

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_Source: https://www.imf.org/-/media/files/publications/ftn063/2022/english/ftnea2022005.pdf_