## 1.1 A General Framework ## Source details **Canonical URL:** [1.1 A General Framework](https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023214-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2023/english/wpiea2023214-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2023/english/wpiea2023214-print-pdf.pdf.json) --- ### Purpose and scope - Aim: identify macrofinancial risks from crypto assets, analyze macrofinancial implications, and provide a dynamic framework to systematically assess them across time and countries. - Proposed outputs: - A macrofinancial framework to gauge, understand and track risks from crypto assets including “stablecoins”, unbacked tokens, utility tokens, and security tokens. - Identification of micro-prudential vulnerabilities. - The Crypto Risk Assessment Matrix (C-RAM), consisting of three steps: a decision tree, a country-level risk mapping, and a global crypto risk assessment matrix. ### Context and market size - Market capitalization: about $US 1.2 trillion as of end April 2023. - Potential benefits: more efficient payment systems, faster cross-border transfers including remittances, lower transaction costs and greater financial inclusion. - Key concerns: high risks of spillovers to the rest of the financial sector and the economy, losses from large asset price corrections, and lack of transparency about underlying value and transactions. ### Need for a redesigned systemic risk framework - Traditional systemic risk frameworks require adaptation because: - Some traditional early warning indicators (e.g., bank credit growth or household prices) may not be appropriate for crypto. - Empirical tools used for systemic risk analysis (growth-at-risk (GaR), capital-flows-at-risk (CaR), the Fund’s vulnerability exercise (VE)) do not incorporate crypto-related indicators or are not well-suited for crypto-related risks. - The nature of vulnerabilities, contagion and amplification channels, and linkages with real sectors are not yet well understood. - A redesigned framework should include: - New analysis tools and novel transmission channels between the financial sector and the rest of economic sectors. - Policy recommendations well-tailored to address vulnerabilities posed by crypto assets. - Appropriate granular data across sectors and information on legal and regulatory status of crypto assets (e.g., legal tender status, outright bans). ### The Crypto Risk Assessment Matrix (C-RAM) - Structure: - Step 1: Decision tree. - Step 2: Country-level risk mapping highlighting vulnerabilities, potential triggers leading to systemic risk, and potential policy tools. - Step 3: Global crypto risk assessment matrix identifying global risks exogenous to countries with implications for macrofinancial stability. ### Linkages and transmission channels - Linkages between crypto assets and the rest of the economy are currently limited but rapidly being established. - Crypto assets can create a de facto new “shadow financial system”; linkages with the traditional financial sector can be substantial. - Novel or especially important transmission channels include: - Currency substitution of fiat currencies by crypto assets, potentially reducing the effectiveness of monetary policy and increasing volatility of cross-border capital flows. - Elevated operational/cyber vulnerabilities that can rapidly propagate shocks. ### Data, transparency and multilateral gaps - High-priority gaps exist, especially in the multilateral sphere. - Data and transparency issues are key constraints for monitoring and policy implementation. - Effectiveness of regulatory frameworks depends on availability of data on transactions, market size, transparency about counterparties, intermediaries and how crypto assets affect overall risk. ### Alignment with existing IMF work - Complementary to IMF policy paper “Elements of Effective Policies for Crypto Assets” (IMF, 2023a) and other IMF outputs (IMF, 2021a; IMF, 2022a; Article IV staff reports; Financial System Stability Assessments). - The paper aims to contribute to policy and monitoring gaps and complement data and transparency efforts. ### Conceptual deviations from standard financial-market analysis - Some standard indicators and tools may be inappropriate or insufficient for crypto-related risks. - The redesigned framework must account for: - Novel market structure and governance characteristics of crypto ecosystems. - Faster propagation and amplification via automated processes and decentralized networks. - Difficulties in monitoring, supervising, and legally classifying crypto assets. ### Source attribution - *Source: IMF Working Paper — Assessing Macrofinancial Risks from Crypto Assets (section 1.1 A General Framework).* --- ### 2.2 Macro-prudential risks and linkages ### Risks to the real sector - Principal transmission channels: households and corporates. - Household exposures: - Significantly increased during the recent boom in crypto assets, producing wealth effects from market ambiguities and price fluctuations. - Excessive risk taking and leveraged exposure among households could introduce spillovers to the rest of the economy. - Corporate exposures: - So far more limited. - Future integration of crypto into payment systems and supply chains could strengthen the corporate channel and increase vulnerabilities in profitability, asset/liability mismatches and cash flows. ### Fiscal sector implications - Fiscal channels affected: revenue, expenditure and financing. - Crypto market fluctuations that affect growth and the real sector will be reflected in fiscal revenues; downturns can put pressure on fiscal deficits. - Countries where cryptos are legal tender, or where governments depend on unconventional financing from crypto platforms, face severe potential impacts on fiscal revenues and financing. - Crypto usage for fraudulent purposes or tax evasion could substantially affect tax revenues even if not legal tender. - Taxation of crypto assets, market makers and participants is noted as a potential revenue channel. - Expenditure-side risks arise from financial intermediaries that hold crypto on balance sheets, including government-established trust funds or SOEs. - Price fluctuations could lead to losses on bank balance sheets: - directly through banks' own holdings of crypto assets, - indirectly through banks' credit exposure to crypto issuers. - Fiscal costs could emerge via bailouts or recapitalization of systemically important financial institutions and state-owned enterprises. ### External sector and monetary transmission - Main current external risks: remittances and volatility of cross-border capital flows; crypto adoption could lower transaction costs and be an increasingly important transmission channel. - Lower transaction costs could trigger highly volatile capital flows relying increasingly on cryptocurrencies. - Trade transmission could be amplified and affect macroeconomic stability if crypto markets destabilize. - Reserve adequacy, external buffers and capital flow management (CFM) measures might need revisiting for countries with high crypto usage. - Decentralized nature of crypto markets could affect monetary transmission by: - accelerating bank disintermediation, - reducing the effectiveness of capital controls, - undermining traditional credit transmission channels, - creating a parallel market for exchange rates and domestic currencies, - causing mismeasurement of money supply due to lack of data on issuance size, holdings and transactions. --- ### 2.3 Financial sector linkages ### Structure and interdependencies - Crypto ecosystem actors are substantially intertwined with the traditional financial industry: savers/investors and borrowers can access both traditional intermediaries and crypto platforms. - Crypto platforms depend on traditional financial institutions for custodial services, storage of funds, liquidity provision and funding. - Crypto platforms lack direct access to central bank liquidity and are dependent on commercial banks for liquidity needs. ### Direct exposures and concentration - Direct exposures between commercial banks and cryptos are currently relatively small but likely unevenly distributed. - Basel III Monitoring Report (BCBS, 2023) findings: - total prudential crypto asset exposures reported by banks amounted to approximately €2.9 billion, - crypto assets under custody reported by banks amounted to approximately €1.0 billion, - these represent 0.013% and 0.005% of total exposures across the sample of banks, respectively. - High specialization and concentration in high-tech geographic areas suggests exposures may be much higher for smaller commercial banks specialized in technological companies. - Example: Signature and Silvergate Capital failures following the panic after Silicon Valley Bank (SVB) failure—SVB had a depositor base including startups, fintech and crypto firms; a relatively large fraction of SVB deposits were owned by crypto firms. ### Vulnerabilities of centralized crypto issuers and platforms - Centralized crypto issuers supplying assets with a claim (e.g., stablecoins) are particularly vulnerable and pose substantial contagion risks: - need sufficient high-quality liquid assets to guarantee redemption, - vulnerable to price changes of backing assets, - no access to central bank emergency liquidity or reserve accounts, making them vulnerable to liquidity freezes or solvency concerns of correspondent commercial banks. - Crypto platforms (exchanges, DeFi platforms, crypto payment platforms) are central and prone to high risks: - intermediate or enable exchanges including payment uses, - create innovative credit products via DeFi, - may perform maturity transformation, taking maturity and liquidity risk, - obtain liquidity from traditional financial intermediaries and thus transmit risks to them. ### Contagion dynamics - Contagion through expectations is particularly relevant given high opacity and uncertainty in the crypto industry. - Recent episodes (failures of Terra, FTX and SVB) propagated quickly within the crypto industry and across traditional financial institutions, especially those linked to high-tech sectors. - Empirical evidence indicates volatility spillovers among crypto and financial assets increase during heightened turbulence due to negative news, crypto events, or exogenous shocks (Iyer and Popescu, 2023). - While counterparty contagion is not directly linked to Bitcoin and other crypto assets without claim on the issuer, liquidity shortages can propagate rapidly because crypto platforms and issuers with claims rely heavily on commercial bank liquidity. - Failures of systemic crypto players (e.g., miners/validators) could spread quickly as these agents perform vital operations guaranteeing the financial integrity of crypto assets. ### Longer-term implications and policy tools - Tokenization and widespread crypto adoption could lead to disintermediation of bank deposits, which: - may benefit consumers through competition, - could undermine credit provision and weaken bank solvency ratios, producing negative feedback effects with the real sector. - A financial sector dominated by crypto firms may be more vulnerable initially as regulation and supervision adapt. - Tokenization could lead to stronger bank competition in crypto activities and reduce regulatory arbitrage benefits of crypto firms. - Optimal policy responses at micro- and macro-prudential levels need adaptation: - Micro-prudential: redefine or impose minimum capital, regulatory or liquidity ratios on crypto assets for proper risk management. - Macro-prudential: extend borrower-based measures (debt service to income limits, loan-to-value ratios) and access rules to emergency liquidity to crypto-related activities. - Implementation challenges include automation and decentralization complicating governance, regulation and supervision. - Some key crypto actors could grow into systemic importance, enabling: - additional capital surcharges for systemically important DeFi lenders, - declaration of certain agents (validation, exchange, custody) as systemically important with special regulations and oversight. --- ### 2.4 Distinctive features brought by crypto assets to the framework - New business models and forms of financial intermediation, financial instruments, markets and infrastructures, creating de facto a parallel alternative financial system. - Decentralized market and governance structure of main crypto actors. - Crypto assets constitute a new parallel financial system that includes many of its key elements (financial intermediaries and markets, financial market infrastructures, and instruments, including money-like). - Very fast market response due to automated execution of transactions leading to high price volatility and financial instability, which could also generate unexpected fiscal risks. - Some of the largest crypto assets have no claim on the issuer. - High operational/cyber risks due to high technical complexity and weak governance. - Novel transmission channels to real sector, including much lower barriers to cross-border propagation. - Lack of appropriate data for supervision and regulation. - Rapidly evolving legal and regulatory framework, including the recognition of crypto assets as legal tender in certain countries, impacting fiscal and monetary policy. - Highly dynamic and innovative market environment that obstructs effective monitoring and supervision, and easily circumvents regulatory measures. --- ### Box 1 — Triggers and transmission channels in the failure of FTX and SVB - FTX: - Major crypto exchange and hedge fund headquartered in The Bahamas, failed in November 2022. - Failures highlighted inadequate governance and opaque corporate interlinkages among large crypto players. - FTX provided custodian, brokerage, exchange, clearing and settlement, and trading services. - FTT, an unbacked crypto-asset token issued by FTX, was predominantly present in cross exposures between FTX and Alameda Research. - A run on FTX spilled over into crypto asset markets, including stablecoins and DeFi; contagion to wider financial markets was limited but investor losses and spillovers across the broader crypto ecosystem were very significant. - Silicon Valley Bank (SVB): - State-chartered bank mainly operating in the San Francisco Bay area, closely tied to the high-tech industry; depositor base included startups, fintech companies and crypto firms. - As venture capital and high-tech startups ran into financial stress post-pandemic, SVB faced large deposit drains. - High vulnerabilities, inadequate supervision and heavy losses after increased interest rates led to its collapse in March 2023. - All SVB deposits were fully guaranteed, but SVB’s failure impacted Silvergate Capital and Signature and caused financial turmoil and price drops in the crypto industry. --- ### 3 The Crypto-Risk Assessment Matrix (C-RAM) — Overview ### Three-step approach - Step 1: Decision tree to assess crypto sector’s macro-criticality in an economy. - Step 2: Indicators comparable to traditional macrofinancial monitoring for country risk mapping. - Step 3: Global macrofinancial risks from crypto assets with implications for a country’s systemic risk assessment. - Data availability and granularity remain an issue; proxies could temporarily gauge macrofinancial linkages and risks. - Proposal: a dynamic data initiative allowing country experts and officials to contribute to databases as more data becomes available. ### i. First Step: The Decision Tree - Objective: assess macrocriticality of crypto assets in an economy (macrocriticality defined as an economic issue that significantly influences present or prospective balance of payments or domestic stability). - If crypto assets or the crypto sector are macro-critical, they are automatically included in country monitoring. - Decision routes: - If crypto assets are used as legal tender (example countries cited), include in country monitoring since legal tender status may incentivize adoption, undermine monetary policy effectiveness or create fiscal risks. - Coverage and macrofinancial linkages depend on legal restrictions on holdings by sectors and agents; if financial institutions are prohibited from holding crypto assets, the financial sector may be excluded from risk assessment. - Private-asset route: if crypto assets are private assets with economy-wide implications, coverage depends on macro-criticality; if not macro-critical, monitoring is optional but does not preclude micro-prudential regulation or supervision. ### ii. Second Step: Country Risk Mapping - Focus: quantify crypto risks via country risk mapping based on a risk matrix identifying vulnerabilities, triggers, risk implications and policy options. - Seven groups of vulnerabilities identified: 1. Systemic importance 2. Credit risk 3. Concentration risk 4. Liquidity risk 5. Market risk 6. Regulatory risk 7. Operational risk --- ### 7 Operational risk (chapter 7 highlights) ### Systemic importance and measurement - Systemic importance: significance of a sector/issue in an economy and potential macroeconomic impact from negative spillovers or shocks from the crypto sector. - Suggested measurement indicators: - Crypto assets market cap as percent of GDP. - Crypto adoption indicators in an economy. - DeFi adoption in an economy. - Comparisons to size of traditional financial sector assets, including nonbanks. - Data limitations: country data expected to become more accessible and comparable over time; time-series data may be hard to obtain given nascency. ### Counterparty credit risk - Relevance: counterparty credit risk can be relevant when crypto-denominated trade and assets are substantial. - Measurement suggestions: - Adoption of crypto assets in transactions or trade as percent of GDP. - Sectoral focus if granular balance sheet data is available. - Consider cross-border repayment risk for exports and imports. - Stablecoin-specific concerns: stablecoins with claims on issuers imply credit risk depending on quality of backing assets. - Risk triggers and spillovers: large crypto price fluctuations, corporate defaults, defaults of crypto agents, fire sales from liquidity squeezes, potential spillovers via financial sector and DeFi. ### Concentration risk and interconnectedness - Covers concentrated or common exposures to crypto assets, exposures to crypto issuers and platforms, and interconnectedness within DeFi, the financial sector, and the rest of the economy. - Data constraints: current challenges may limit measurement to aggregate level; BIS published limited exposure data in 2022. - Risk triggers: sudden asset price fluctuations, increase in cybercrime, geopolitical shocks and fragmentation. - Consequences: fire sales, margin calls, contagion within/between sectors, further price corrections. ### Liquidity risk - Primary linkage: mainly linked to backed stablecoins and other backed assets. - Information gaps: little information on reserves, stabilization mechanisms, and adequacy of reserves for stablecoin issuers. - Vulnerability indicators: reserve ratios and detailed info on asset quality and liabilities of stablecoin issuers. - Potential triggers and spillovers: events similar to the “crypto winter”: increased risk aversion, visible balance sheet vulnerabilities, rapid spillovers via financial sector and household exposures. ### Market risk - Nature: risks from mispricing of crypto assets such as overvaluation and price bubbles. - Suggested indicators: market structure measures, liquidity squeezes, bid-ask spreads, volatility ratios, turnover ratios, and other liquidity measures. - Triggers: monetary policy changes, margin calls, fire sales, or liquidity shocks. ### Regulatory risk - Scope: legal infrastructure, resolution frameworks, and capacity to manage crypto assets. - Assessment approach: qualitative—indicate whether necessary infrastructure exists and is effective. - Recommendation: country experts and officials should follow the framework in the IMF Board paper “Elements of Effective Policies for Crypto Assets”. ### Operational risk (IT infrastructure, cybersecurity, and operational capacity) - Definition: vulnerabilities stemming from actual IT infrastructure and capacity in a crypto-using country. - Assessment approach: qualitative determination of strength of IT infrastructure, crypto payment systems and custodians, miners, e-wallets, other crypto infrastructures, and cybersecurity measures. ### Policy options and mitigation (Country Risk Mapping) - Policy instruments listed: - Existing macroprudential policies. - Crypto-sector specific micro- and macro-financial regulation and supervision to improve sector resilience. - Insurance mechanisms. - International monitoring frameworks. - Data provision and formal reporting, including assessment and disclosure of crypto ecosystem fiscal risks in the government’s fiscal risk statement. - Additional (risk-weighted) buffers for crypto-exposures of banks, NFCs and NBFIs. - Reserve requirements for stablecoins. - National and international regulatory frameworks and resolution mechanisms. ### Third Step: Global Crypto Risk Assessment Matrix (Global C-RAM) - Purpose: assess global risks for or from crypto assets with implications for macroeconomic stability and systemic risk. - Inputs: builds on IMF, FSB, and BIS work. - Noted global risks (examples): - financial stability risks/spillovers of runs on cryptocurrencies, - implications for monetary policy transmission, - climate costs of “mining” especially for emerging markets, - severe turmoil and disruption in parts of the crypto market, - crypto contagion. - Usage: Global C-RAM maps global risks, reflects likelihood of each risk materializing, and helps country experts adjust implications and policy options. - Coordination and data needs: alignment by standard-setting bodies (FSB, BIS) and addressing data/reporting gaps via SSBs and IFIs. --- ### 4.3 Vietnam — summary and policy implications ### Context - Some data sources (e.g., Chainalysis or Statista) report that crypto use in Vietnam is among the highest in the world. - Vietnamese law does not make any references to these assets; virtual currencies are not recognized as a means of payment and using crypto as means of payment can incur heavy fines. - It is illegal to conduct financial transactions in virtual currencies in Vietnam. - No strong evidence that the financial sector is exposed to crypto. ### Decision Tree (Step 1) - Vietnam has one of the highest crypto adoption levels in the world, but macrocriticality is unclear given legal prohibitions on payment use and limited financial sector exposure. ### Country Risk Mapping (Step 2) - Credit risk: - Relevant in e-commerce, e-wallet and digital payments with cross-country comparisons. - Regulatory and operational risk: - State Bank of Vietnam efforts to reinforce regulations against operational (cybersecurity) and regulatory (surveillance) risks. - Concentration risk: - May be relevant given increasing presence of fintech. - Consumer protection, AML/CFT, and financial integrity: - Rapid fintech development including crypto has implications for fraud on DeFi platforms, AML/CFT risks, and financial integrity. - Legal and legislative gaps: - Lack of clear and complete legislation identified as a risk in P2P and crypto activities. ### Global Crypto Risks (Step 3) - Global crypto risks likely relevant for Vietnam given relatively high dependence on external markets. ### Policy challenges and priority areas (non-exhaustive) i. Data collection - Need for sufficiently granular and high frequency data to view credit exposures, including crypto providers and traditional intermediaries. - Data should include foreign exposures and payment/service providers to assess systemic importance. - Recommendation: set granular and high frequency data reporting requirements for crypto firms and financial institutions. - Recommendation: facilitate coverage of crypto-related data in monetary, external and other official macroeconomic statistics (IMF, 2019; FITT, 2022). - Recommendation: establish international data sharing arrangements between national regulators. ii. Building supervisory bodies and international cooperation - Decentralized market and governance structure impede effective monitoring and supervision. - Digital nature and distributed ledgers favor real time and granular data gathering. - Recommendation: establish or reinforce international supervisory bodies and coordination among them (IMF, 2023e). iii. Expanding macroprudential toolkit with crypto and DeFi specific measures - Reinforce micro and macroprudential supervision as first line of defense. - Monitor cross exposures between crypto actors and financial institutions; impose appropriate risk weights and maximum concentration ratios. - Stablecoin issuers: enforce sufficient capital and liquidity minimum requirements. - Enforce regulations to reduce operational vulnerabilities and cyber risks. - Conduct system-wide analysis of cross-interdependencies and impose appropriate structural tools. - Consider interactions with other macro policies such as monetary policy and CFMs. ### Conclusion (Vietnam context) - Rapid private crypto sector growth is creating a shadow financial system with substantial risk implications. - Existing policy frameworks have not fully caught up; priority needs are better data, monitoring, international cooperation, and expansion of macroprudential policies with crypto/DeFi orientation. - The C-RAM is proposed as a dynamic three-step tool to assess micro and macroprudential risks; coordination among international organizations will help refine and tailor policies. --- ### Appendix: Crypto taxonomy, main actors and risks ### Definition - Crypto assets: privately issued digital representation of value, cryptographically secured, and deployed using a distributed ledger technology. CBDCs are excluded. ### Distinguishing features - a) centralized or decentralized issuance; - b) existence of a claim on the issuer; - c) backing assets; - d) stability of price. ### Classification (based on IMF, 2023a) - Unbacked tokens: - Example: Bitcoin. - No backing assets, usually decentralized, transferable, no redemption pledge, no direct claims on issuer. - Stablecoins: - Example: Tether. - Usually issued by a centralized entity and designed to maintain a stable price. - Utility tokens: - Usually centrally issued and provide access to a product or service. - Security tokens: - Usually centrally issued, transferable, and meet the definition of a security within jurisdictions. ### Main Risks (high-level tables summarized) - By crypto asset type: - Unbacked tokens: Market risk X; Liquidity risk X - Stablecoins: - With claim on issuer: Credit risk X; Market risk X; Liquidity risk X; Operational and cyber X - Without claim on issuer: Market risk X; Liquidity risk X; Operational and cyber X - Utility and security tokens: Market risk X - By function/actor: - Issuers: Market risk X; Liquidity risk X; Operational/cyber X; Credit risk X - Miners/validators: Market risk X; Operational/cyber X - Crypto exchanges/platforms: Credit risk X; Market risk X; Liquidity risk X; Operational/cyber X - Wallet providers: Credit risk X; Market risk X; Liquidity risk X; Operational/cyber X - Investors: Credit risk X; Market risk X; Liquidity risk X - Payment providers: Credit risk X; Market risk X; Liquidity risk X; Operational/cyber X --- *Source: IMF Working Paper “Assessing Macrofinancial Risks from Crypto Assets”, content unit wpiea2023214-print-pdf.* ### 1.1 A General Framework ................................................................................................ ### 1.1 A General Framework ### Purpose and scope - Aim: identify macrofinancial risks from crypto assets, analyze macrofinancial implications, and provide a dynamic framework to systematically assess them across time and countries. - Proposed outputs: - A macrofinancial framework to gauge, understand and track risks from crypto assets including “stablecoins”, unbacked tokens, utility tokens, and security tokens. - Identification of micro-prudential vulnerabilities. - The Crypto Risk Assessment Matrix (C-RAM), consisting of three steps: a decision tree, a country-level risk mapping, and a global crypto risk assessment matrix. ### Context and market size - Market capitalization: about $US 1.2 trillion as of end April 2023. - Potential benefits noted: more efficient payment systems, faster cross-border transfers including remittances, lower transaction costs and greater financial inclusion. - Key concerns noted: high risks of spillovers to the rest of the financial sector and the economy, losses from large asset price corrections, and lack of transparency about underlying value and transactions. ### Need for a redesigned systemic risk framework - Traditional systemic risk frameworks require adaptation because: - Some traditional early warning indicators (e.g., bank credit growth or household prices) may not be appropriate for crypto. - Empirical tools used for systemic risk analysis (growth-at-risk (GaR), capital-flows-at-risk (CaR), the Fund’s vulnerability exercise (VE)) do not incorporate crypto-related indicators or are not well-suited for crypto-related risks. - The nature of vulnerabilities, contagion and amplification channels, and linkages with real sectors are not yet well understood. - A redesigned framework should include: - New analysis tools and novel transmission channels between the financial sector and the rest of economic sectors. - Policy recommendations well-tailored to address vulnerabilities posed by crypto assets. - Appropriate granular data across sectors and information on legal and regulatory status of crypto assets (e.g., legal tender status, outright bans). ### The Crypto Risk Assessment Matrix (C-RAM) - Structure: - Step 1: Decision tree. - Step 2: Country-level risk mapping highlighting vulnerabilities, potential triggers leading to systemic risk, and potential policy tools. - Step 3: Global crypto risk assessment matrix identifying global risks exogenous to countries with implications for macrofinancial stability. ### Linkages and transmission channels - Linkages between crypto assets and the rest of the economy are currently limited but rapidly being established. - Crypto assets can create a de facto new “shadow financial system”; linkages with the traditional financial sector can be substantial. - Novel or especially important transmission channels include: - Currency substitution of fiat currencies by crypto assets, potentially reducing the effectiveness of monetary policy and increasing volatility of cross-border capital flows. - Elevated operational/cyber vulnerabilities that can rapidly propagate shocks. ### Data, transparency and multilateral gaps - High-priority gaps exist, especially in the multilateral sphere. - Data and transparency issues are key constraints for monitoring and policy implementation. - Effectiveness of regulatory frameworks depends on availability of data on transactions, market size, transparency about counterparties, intermediaries and how crypto assets affect overall risk. ### Alignment with existing IMF work - Complementary to IMF policy paper “Elements of Effective Policies for Crypto Assets” (IMF, 2023a) and other IMF outputs (IMF, 2021a; IMF, 2022a; Article IV staff reports; Financial System Stability Assessments). - The paper aims to contribute to policy and monitoring gaps and complement data and transparency efforts. ### Conceptual deviations from standard financial-market analysis - Some standard indicators and tools may be inappropriate or insufficient for crypto-related risks. - The redesigned framework must account for: - Novel market structure and governance characteristics of crypto ecosystems. - Faster propagation and amplification via automated processes and decentralized networks. - Difficulties in monitoring, supervising, and legally classifying crypto assets. *Source: IMF Working Paper — Assessing Macrofinancial Risks from Crypto Assets (section 1.1 A General Framework).* ### 2.2 MACRO-PRUDENTIAL RISKS AND LINKAGES ### 2.2 MACRO-PRUDENTIAL RISKS AND LINKAGES ### Risks to the real sector - Principal transmission channels to the real sector come from households and corporates. - Household exposures significantly increased with the recent boom in crypto assets, producing wealth effects from market ambiguities and price fluctuations. - Excessive risk taking and, in some cases, leveraged exposure among households could introduce spillovers to the rest of the economy. - Corporate exposure so far has been more limited, but future integration of crypto assets into payment systems and supply chains would: - strengthen the corporate channel, - increase corporate vulnerability in terms of profitability, asset/liability mismatches and cash flows. ### Fiscal sector implications - Crypto markets affect the fiscal sector through revenue, expenditure and financing channels. - Fluctuations in crypto assets that affect economic growth and the real sector will be reflected in fiscal revenues; downturns can put pressure on the fiscal deficit. - Countries where cryptos are legal tender, or where governments depend on unconventional financing from crypto platforms, face severe potential impacts on fiscal revenues and financing. - Crypto usage for fraudulent purposes or tax evasion could substantially affect tax revenues even if not legal tender. - Taxation of crypto assets, market makers and participants is noted as a potential component of the revenue channel. - Expenditure-side risks primarily arise from the financial sector or any financial intermediary that holds crypto assets on its balance sheet, including government-established trust funds or SOEs participating in crypto ecosystems. - Price fluctuations could lead to losses on bank balance sheets: - directly through banks' own holdings of crypto assets, - indirectly through banks' credit exposure to crypto issuers. - Fiscal costs could emerge via bailouts or recapitalization of systemically important financial institutions and state-owned enterprises. ### External sector and monetary transmission - Main current external risks come from remittances and volatility of cross-border capital flows; crypto adoption could lower transaction costs and become an increasingly important transmission channel. - Lower transaction costs could trigger highly volatile capital flows relying increasingly on crypto currencies. - Trade transmission could be amplified and affect macroeconomic stability if crypto markets destabilize. - Reserve adequacy, external buffers and capital flow management (CFM) measures might need revisiting for countries with high crypto usage (IMF 2020; He et al., 2022). - Decentralized nature of crypto markets could affect monetary transmission by: - accelerating bank disintermediation, - reducing the effectiveness of capital controls, - undermining traditional credit transmission channels, - creating a parallel market for exchange rates and domestic currencies, - causing mismeasurement of money supply due to lack of data on issuance size, holdings and transactions. --- ### 2.3 FINANCIAL SECTOR LINKAGES ### Structure and interdependencies - The crypto ecosystem involves key actors substantially intertwined with the traditional financial industry: savers/investors and borrowers can access both traditional intermediaries and crypto platforms. - Crypto platforms depend on traditional financial institutions for custodial services, storage of funds, liquidity provision and funding. - Crypto platforms lack direct access to central bank liquidity and are dependent on commercial banks for liquidity needs. ### Direct exposures and concentration - Direct exposures between commercial banks and cryptos are currently relatively small but likely unevenly distributed. - A Basel III Monitoring Report (BCBS, 2023) shows: - total prudential crypto asset exposures reported by banks amounted to approximately €2.9 billion, - crypto assets under custody reported by banks amounted to approximately €1.0 billion, - these represent 0.013% and 0.005% of total exposures across the sample of banks, respectively. - High specialization and concentration in high-tech geographic areas suggests exposures may be much higher for smaller commercial banks specialized in technological companies. - Example: Signature and Silvergate Capital failures following the panic after Silicon Valley Bank (SVB) failure—SVB had a depositor base including startups, fintech and crypto firms; a relatively large fraction of SVB deposits were owned by crypto firms. ### Vulnerabilities of centralized crypto issuers and platforms - Centralized crypto issuers supplying assets with a claim (e.g., stablecoins) are particularly vulnerable and pose substantial contagion risks: - need sufficient high-quality liquid assets to guarantee redemption, - vulnerable to price changes of backing assets, - no access to central bank emergency liquidity or reserve accounts, making them vulnerable to liquidity freezes or solvency concerns of correspondent commercial banks. - Crypto platforms (exchanges, DeFi platforms, crypto payment platforms) are central and prone to high risks: - intermediate or enable exchanges including payment uses, - create innovative credit products via DeFi, - may perform maturity transformation, taking maturity and liquidity risk, - obtain liquidity from traditional financial intermediaries and thus transmit risks to them. ### Contagion dynamics - Contagion through expectations is particularly relevant given high opacity and uncertainty in the crypto industry. - Recent episodes (failures of Terra, FTX and SVB) propagated quickly within the crypto industry and across traditional financial institutions, especially those linked to high-tech sectors. - Empirical evidence indicates volatility spillovers among crypto and financial assets increase during heightened turbulence due to negative news, crypto events, or exogenous shocks (Iyer and Popescu, 2023). - While counterparty contagion is not directly linked to Bitcoin and other crypto assets without claim on the issuer, liquidity shortages can propagate rapidly because crypto platforms and issuers with claims rely heavily on commercial bank liquidity. - Failures of systemic crypto players (e.g., miners/validators) could spread quickly as these agents perform vital operations guaranteeing the financial integrity of crypto assets. ### Longer-term implications and policy tools - Tokenization and widespread crypto adoption could lead to disintermediation of bank deposits, which: - may benefit consumers through competition, - could undermine credit provision and weaken bank solvency ratios, producing negative feedback effects with the real sector. - A financial sector dominated by crypto firms may be more vulnerable initially as regulation and supervision adapt. - Tokenization could lead to stronger bank competition in crypto activities and reduce regulatory arbitrage benefits of crypto firms. - Optimal policy responses at micro- and macro-prudential levels need adaptation to the crypto ecosystem: - Micro-prudential: redefine or impose minimum capital, regulatory or liquidity ratios on crypto assets for proper risk management. - Macro-prudential: extend borrower-based measures (debt service to income limits, loan-to-value ratios) and access rules to emergency liquidity to crypto-related activities. - Implementation challenges include automation and decentralization complicating governance, regulation and supervision. - Some key crypto actors could grow into systemic importance, enabling: - additional capital surcharges for systemically important DeFi lenders, - declaration of certain agents (validation, exchange, custody) as systemically important with special regulations and oversight. --- ### 2.4 DISTINCTIVE FEATURES BROUGHT BY CRYPTO ASSETS TO THE FRAMEWORK - New business models and forms of financial intermediation, financial instruments, markets and infrastructures, creating de facto a parallel alternative financial system - Decentralized market and governance structure of main crypto actors - Crypto assets constitute a new parallel financial system that includes many of its key elements (financial intermediaries and markets, financial market infrastructures, and instruments, including money-like) - Very fast market response due to automated execution of transactions leading to high price volatility and financial instability, which could also generate unexpected fiscal risks - Some of the largest crypto assets have no claim on the issuer - High operational/cyber risks due to high technical complexity and weak governance - Novel transmission channels to real sector, including much lower barriers to cross-border propagation - Lack of appropriate data for supervision and regulation - Rapidly evolving legal and regulatory framework, including the recognition of crypto assets as legal tender in certain countries, impacting fiscal and monetary policy - Highly dynamic and innovative market environment that obstructs effective monitoring and supervision, and easily circumvents regulatory measures --- ### Box 1 — Triggers and transmission channels in the failure of FTX and SVB - FTX: - Major crypto exchange and hedge fund headquartered in The Bahamas, failed in November 2022. - Failures highlighted inadequate governance and opaque corporate interlinkages among large crypto players. - FTX provided custodian, brokerage, exchange, clearing and settlement, and trading services. - FTT, an unbacked crypto-asset token issued by FTX, was predominantly present in cross exposures between FTX and Alameda Research. - A run on FTX spilled over into crypto asset markets, including stablecoins and DeFi; contagion to wider financial markets was limited but investor losses and spillovers across the broader crypto ecosystem were very significant. - Silicon Valley Bank (SVB): - State-chartered bank mainly operating in the San Francisco Bay area, closely tied to the high-tech industry; depositor base included startups, fintech companies and crypto firms. - As venture capital and high-tech startups ran into financial stress post-pandemic, SVB faced large deposit drains. - High vulnerabilities, inadequate supervision and heavy losses after increased interest rates led to its collapse in March 2023. - All SVB deposits were fully guaranteed, but SVB’s failure impacted Silvergate Capital and Signature and caused financial turmoil and price drops in the crypto industry. --- ### 3 The Crypto-Risk Assessment Matrix (C-RAM) — Overview - Three-step approach to incorporate macrofinancial crypto risks into country monitoring: 1. Decision tree to assess crypto sector’s macro-criticality in an economy. 2. Indicators comparable to traditional macrofinancial monitoring for country risk mapping. 3. Global macrofinancial risks from crypto assets with implications for a country’s systemic risk assessment. - Data availability and granularity remain an issue; proxies could temporarily gauge macrofinancial linkages and risks. - Proposal is a dynamic data initiative allowing country experts and officials to contribute to databases as more data becomes available. ### i. First Step: The Decision Tree - Objective: assess macrocriticality of crypto assets in an economy (macrocriticality defined as an economic issue that significantly influences present or prospective balance of payments or domestic stability). - If crypto assets or the crypto sector are macro-critical, they are automatically included in country monitoring. - Decision routes: - If crypto assets are used as legal tender (example countries cited), include in country monitoring since legal tender status may incentivize adoption, undermine monetary policy effectiveness or create fiscal risks. - Coverage and macrofinancial linkages depend on legal restrictions on holdings by sectors and agents; if financial institutions are prohibited from holding crypto assets, the financial sector may be excluded from risk assessment. - Private-asset route: if crypto assets are private assets with economy-wide implications, coverage depends on macro-criticality; if not macro-critical, monitoring is optional but does not preclude micro-prudential regulation or supervision. ### ii. Second Step: Country Risk Mapping - Focus: quantify crypto risks via country risk mapping based on a risk matrix identifying vulnerabilities, triggers, risk implications and policy options. - Seven groups of vulnerabilities identified: 1. Systemic importance 2. Credit risk 3. Concentration risk 4. Liquidity risk 5. Market risk 6. Regulatory risk *Italic: Source: wpiea2023214-print-pdf - 2.2 MACRO-PRUDENTIAL RISKS AND LINKAGES* ### 7. Operational risk ### 7. Operational risk ### Systemic importance and measurement - Systemic importance refers to the significance of a sector/issue in an economy and its potential impact on macroeconomic stability and systemic risk from negative spillovers or shocks from the crypto sector. - Measurement indicators suggested: - Crypto assets market cap as percent of GDP. - Crypto adoption indicators in an economy. - DeFi adoption in an economy. - Comparisons to size of traditional financial sector assets, including nonbanks. - Data limitations: - Country data expected to become more accessible and comparable over time. - Time-series data may be hard to obtain given the nascency of crypto sector assets. - Use-case: - Indicators inform the decision-tree step and identification of macro-policy focused risk triggers (e.g., monetary policy tightening, increasing risk aversion) that could cause repricing of crypto assets with systemic implications. ### Counterparty credit risk - Relevance: - Even if some crypto assets lack claims on an issuer, counterparty credit risk can be relevant when crypto-denominated trade and assets are substantial. - Measurement suggestions: - Adoption of crypto assets in transactions or trade as percent of GDP. - Sectoral focus by adding crypto transactions of non-financial corporates and crypto transactions of non-bank financial institutions if granular data is available. - Consideration of cross-border repayment risk for exports and imports. - Stablecoin-specific concerns: - Stablecoins have claims on issuers; therefore credit risk is more likely and depends on quality of backing assets. - Risk triggers and spillovers: - Large fluctuations in crypto asset prices or in backing assets. - Corporate defaults, defaults of crypto agents due to extraneous reasons, or fire sales from liquidity squeezes. - Potential spillovers to the rest of the economy through the financial sector and DeFi, increasing fiscal risk and enabling default cascades via counterparty credit exposures. ### Concentration risk and interconnectedness - Definition: - Concentration risk covers concentrated or common exposure to crypto assets, exposure to crypto issuers and platforms, and interconnectedness within DeFi, the financial sector, and the rest of the economy. - Data constraints: - Given current challenges with crypto-asset data, concentration risk may only be measurable at aggregate level. - Better assessment expected when detailed balance sheet data on crypto holdings becomes available. - BIS published data in 2022 on banks’, NBFIs’, and corporates’ exposure to crypto assets for a limited group of countries (BIS, 2022). - Risk triggers: - Sudden asset price fluctuations. - Increase in cybercrime. - Geopolitical shocks and fragmentation. - Consequences: fire sales of crypto assets, margin calls, contagion within/between sectors, and further price corrections. ### Liquidity risk - Primary linkage: - Mainly linked to backed stablecoins and other backed assets. - Information gaps: - Little information or guidance available about reserves, stabilization mechanisms, and adequacy of reserves for stablecoin issuers. - Vulnerability indicators: - Reserve ratios and detailed information on asset quality and liabilities of stablecoin issuers. - Potential triggers and spillovers: - Events similar to the recent “crypto winter”: increased risk aversion, visible balance sheet vulnerabilities (fragile buffers, reserves, exposures). - Rapid spillovers to the rest of the economy via the financial sector and household exposures, possibly aggravating fiscal problems and growth slowdowns. ### Market risk - Nature of risk: - Risks from mispricing of crypto assets such as overvaluation and price bubbles. - Suggested indicators: - Market structure measures, liquidity squeezes, bid-ask spreads, volatility ratios, turnover ratios, and other liquidity measures. - Triggers: - Monetary policy changes, margin calls, fire sales, or liquidity shocks can lead to systemic events. ### Regulatory risk - Scope: - Legal infrastructure, resolution frameworks, and capacity to manage crypto assets. - Assessment approach: - More qualitative: indicate whether necessary infrastructure exists and is effective. - Recommendation: - Country experts and officials should follow the framework provided in the IMF Board paper “Elements of Effective Policies for Crypto Assets” and related work. ### Operational risk (IT infrastructure, cybersecurity, and operational capacity) - Definition: - Vulnerabilities stemming from actual IT infrastructure and capacity in a crypto-using country. - Assessment approach: - Qualitative determination of strength of IT infrastructure, crypto payment systems and custodians, miners, e-wallets, other crypto infrastructures, and cybersecurity measures. ### Policy options and mitigation (Country Risk Mapping) - The last pillar of “Country Risk Mapping” presents policy options to mitigate risks and spillovers across the seven risk categories. - Potential policy instruments listed: - Existing macroprudential policies. - Crypto-sector specific micro- and macro-financial regulation and supervision to improve sector resilience. - Insurance mechanisms. - International monitoring frameworks. - Data provision and formal reporting, including assessment and disclosure of crypto ecosystem fiscal risks in the government’s fiscal risk statement. - Additional (risk-weighted) buffers for crypto-exposures of banks, NFCs and NBFIs. - Reserve requirements for stablecoins. - National and international regulatory frameworks and resolution mechanisms. ### Third Step: Global Crypto Risk Assessment Matrix (C-RAM) - Purpose: - Assess global risks for or from crypto assets with implications for macroeconomic stability and systemic risk. - Inputs and context: - Builds on IMF, FSB, and BIS work. - GFSR October 2021 (IMF, 2021a) identified global risks: financial stability risks/spillovers of runs on cryptocurrencies, implications for monetary policy transmission, climate costs of “mining” especially for emerging markets, severe turmoil and disruption in parts of the crypto market, and crypto contagion. - FSB consultative reports and BIS December 2022 Quarterly Review (BIS, 2022) highlight widespread implications including spillovers to traditional financial sector, corporate exposure and payments systems. - 2023 IMF policy paper “Elements of Effective Policies for Crypto Assets” (IMF, 2023a) proposes a nine-element framework; monitoring impact on global financial stability is one element. - Usage: - The Global C-RAM table maps global risks, reflects likelihood of each risk materializing in a third column, and helps country experts adjust implications and highlight policy options based on country context. - Coordination and data needs: - Significant need for aligning policies by standard-setting bodies such as FSB and BIS. - Data and reporting gaps should be addressed by SSBs and IFIs. - Global coordination and better data availability would help quantify impact of global crypto risks at country level. *Source: IMF Working Paper — chapter 7. Operational risk* ### 4.3 VIETNAM ### 4.3 VIETNAM ### Context - According to some data sources ( e.g. Chainalysis or Statista), the use of crypto assets in Vietnam is among the highest in the world (Figure 7). - Despite the popularity of Bitcoin and other crypto assets, the Vietnamese law does not make any references to these assets. ### Step 1. Decision Tree - Vietnam has one of the highest crypto adoption levels in the world, but it is unclear crypto should be deemed as macrocritical. - By law, virtual currencies are not recognized as a means of payments, and people using crypto as a means of payment could face heavy fines. - It is illegal to conduct financial transactions in virtual currencies in Vietnam. - There is no strong evidence that the financial sector is exposed to crypto. ### Step 2. Country Risk Mapping - Credit risk considerations: - Relevant in the context of e-commerce, e-wallet and digital payments with cross-country comparisons. - Regulatory and operational risk actions: - Efforts by the State Bank of Vietnam to reinforce regulations against operational (cybersecurity) and regulatory (surveillance) risks. - Concentration risk: - May be relevant given increasing presence of fintech. - Consumer protection, AML/CFT, and financial integrity: - Rapid development of fintech solutions including crypto assets has implications for fraud on decentralized finance platforms, AML/CFT risks, and financial integrity. - Legal and legislative gaps: - Lack of clear and complete legislation is clearly identified as a risk in P2P and crypto activities. ### Step 3. Global Crypto Risks - Global crypto risks are likely to be relevant for Vietnam given its relatively high dependence on external markets. ### Policy Challenges and Implications - The rapid development of the crypto sector presents significant challenges to existing financial and macroprudential policy frameworks. - Identified priority areas (non-exhaustive): i. Data collection - Need for sufficiently granular and high frequency data to provide a broad view of credit exposures, including crypto providers and traditional financial intermediaries. - Data should include foreign exposures in addition to payment providers and other service providers to assess systemic importance in the financial or real sectors. - Decentralization and anonymity pose challenges, but public access to the blockchain facilitates monitoring. - Recommendation: set sufficiently granular and high frequency data reporting requirements for crypto firms and financial institutions. - Recommendation: facilitate coverage of crypto-related data in monetary, external and other official macroeconomic statistics (IMF, 2019; FITT, 2022). - Recommendation: establish international data sharing arrangements between national regulators to facilitate foreign data collection and analysis. ii. Building supervisory bodies and international cooperation given the cross-border risk - Decentralized market and governance structure impede effective monitoring and supervision. - Digital nature and distributed ledgers favor real time and highly granular data gathering. - Recommendation: establish or reinforce international supervisory bodies and coordination among them (IMF, 2023e). iii. Expanding the existing macroprudential policy toolkit with crypto and DeFi specific measures - Reinforce micro and macroprudential supervision as first line of defense. - Monitor cross exposures between crypto actors and financial institutions; impose appropriate risk weights and maximum concentration ratios. - Stablecoin issuers are particularly vulnerable; enforce sufficient capital and liquidity minimum requirements. - Enforce regulations to reduce operational vulnerabilities and cyber risks. - Conduct system-wide analysis of cross-interdependencies between cryptos and traditional financial players and impose appropriate structural tools. - Consider interactions with other macro policies such as monetary policy and CFMs to ensure desirable overall impact from crypto-specific policies. ### Conclusion - The private crypto asset industry has experienced rapid growth and is becoming increasingly integrated into the global economy, representing a new shadow financial system with substantial risk implications for the traditional financial sector and beyond. - Existing policy frameworks have not fully caught up, illustrated by the recent crypto winter, failure of large crypto issuers and platforms, and calls for better data, monitoring and policies. - The paper presents a conceptual framework and a three-step tool, Crypto Risk Assessment Matrix (C-RAM), comprising country risk mapping and a global risk assessment to assess micro and macroprudential risks from the private crypto sector. - Significant policy challenges remain, calling for international cooperation: - Lack of data and centralized data collection is a key challenge and should be prioritized. - Establishing or reinforcing supervisory bodies and international cooperation is of utmost importance. - Current policy toolkit remains inadequate given speed of progress, innovation and decentralized nature of the market; expansion of macroprudential policies with crypto and DeFi-oriented measures is needed. - Consider the interaction and complementarity with other macro policies in crypto policy design. - The conceptual framework is to be updated as more data and country analysis becomes available; coordinated efforts of international organizations will help refine the framework and tailor effective policies to contain macrofinancial risks from crypto assets. ### Appendix: Crypto Taxonomy, Main Actors and Risks - Definition: - Crypto assets are defined as a privately issued digital representation of value, cryptographically secured, and deployed using a distributed ledger technology. CBDCs are excluded from this definition as they are issued by central banks. - Main distinguishing features: - a) centralized or decentralized issuance; - b) existence of a claim on the issuer; - c) backing assets; - d) stability of price. - Classification (based on recent IMF work (IMF, 2023a)): - Unbacked tokens: - Example: Bitcoin. - Characteristics: no backing assets, usually issued in a decentralized manner, transferable, no redemption pledge, provide no direct claims on the issuer. - Stable coins: - Example: Tether. - Characteristics: usually issued by a centralized entity and designed to maintain a stable price. - Utility tokens: - Characteristics: usually centrally issued and provide the token holder with access to an existing or prospective product or service. - Security tokens: - Characteristics: usually centrally issued, transferable, and meet the definition of a security within respective jurisdictions. ### Main Risks (as summarized in source tables) - Table 1. Main Risks for Crypto Holders, by Crypto Asset Type (high-level) - Unbacked tokens: Market risk X; Liquidity risk X - Stable coins: - With claim on issuer: Credit risk X; Market risk X; Liquidity risk X; Operational and cyber X - Without claim on issuer: Market risk X; Liquidity risk X; Operational and cyber X - Utility and security tokens: Market risk X - Table 1. Main Risks by Crypto Asset Function/Actor (high-level) - Issuers: Market risk X; Liquidity risk X (Assets used to back redemptions may change price); Operational/cyber X; Credit risk X (run risk if assets backing cryptos are not enough) - Miners/validators: Market risk X (risk of crypto prices falling, reducing revenues); Operational/cyber X - Crypto exchanges/platforms: Credit risk X (risk of default of borrowers); Market risk X (risk of inventory values falling); Liquidity risk X (risk of not having enough liquidity to meet selling orders of clients); Operational/cyber X - Wallet providers: Credit risk X (risk of default of asset holders); Market risk X (risk of crypto prices falling, reducing revenues); Liquidity risk X; Operational/cyber X - Investors: Credit risk X (risk of default for claim based cryptos); Market risk X (risk of crypto prices falling); Liquidity risk X - Payment providers: Credit risk X; Market risk X (risk of price change during crypto transfer); Liquidity risk X; Operational/cyber X *Source: IMF Working Paper “Assessing Macrofinancial Risks from Crypto Assets”, Chapter 4.3 VIETNAM.* --- _Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023214-print-pdf.pdf_