Addressing the Dark Side of the Crypto World

IMF Blog, March 13, 2018

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Technology (including blockchain) could revolutionize fields beyond finance.
Possible benefits:
- Power financial inclusion by providing new, low-cost payment methods to those who lack bank accounts.
- Empower millions in low-income countries.
Some central banks are considering issuing central bank digital currencies.

Core vulnerability:
- Decentralized design and lack of central bank involvement can create anonymity similar to cash.
- Creates a potentially major new vehicle for money laundering and the financing of terrorism.
Financial stability concerns:
- Rapid growth of crypto-assets, extreme volatility in traded prices, and ill-defined connections to the traditional financial world could create new vulnerabilities.
Notable example:
- In July 2017, an international operation led by the United States shut down AlphaBay, the largest online criminal marketplace on the internet.
- AlphaBay operated for more than two years.
- Before the site was taken offline, more than $1 billion had been exchanged through crypto-assets.
Broader threat dimensions include consumer protection and systemic financial vulnerabilities.

Organizations involved in assessing and setting standards:
- Financial Stability Board (FSB) is looking at what new rules might be needed to meet fintech advancements.
- Financial Action Task Force (FATF) has provided guidance to countries on dealing with cryptocurrencies and other electronic assets.
IMF role and experience:
- Stopping money laundering and combatting terrorist financing has been part of IMF work for the last 20 years.
- Based on FATF standards, the IMF has conducted 65 assessments of countries’ regulatory frameworks.
- The IMF has provided capacity development assistance to 120 countries.
- IMF efforts focus on helping member countries address illicit financial flows.
Regulatory parity:
- Regulators (for example, the U.S. Securities and Exchange Commission and other regulators) now apply the same laws to some initial coin offerings (ICOs) as to offerings of standard securities to increase transparency and alert buyers to potential risks.

Regulatory technology (RegTech) and supervisory technology (SupTech) can help exclude criminals from the crypto world.
Examples of technological approaches:
- Distributed ledger technology (DLT):
- Can speed up information-sharing between market participants and regulators.
- Can be used to create registries of standard, verified, customer information along with digital signatures.
- Better use of data by governments can free up resources for priority needs and reduce tax evasion, including evasion related to cross-border transactions.
- Biometrics, artificial intelligence, and cryptography:
- Can enhance digital security and identify suspicious transactions in close to real time.
- Can enable law enforcement to act faster to stop illegal transactions and remove “pollution” from the crypto-assets ecosystem.
Implementation timeline:
- These advances will take years to refine and implement.

Since crypto-assets know no borders, effective regulation must be global.
AlphaBay closure demonstrated international cooperation:
- Involved Europol and law enforcement agencies in the United States, Thailand, the Netherlands, Lithuania, Canada, the United Kingdom, and France.
Political agenda:
- The Group of Twenty (G-20) agreed to put crypto-assets on the agenda of its November 2018 summit in Argentina.
IMF contribution:
- With near-universal membership and expertise in battling money-laundering and terrorist financing, the IMF is positioned to be a forum for developing collective answers in the evolving crypto-asset space.

Debate on crypto-assets centers on whether they are a bubble, a fad, or a transformational revolution comparable to the advent of the internet.
Policy recommendation summary:
- Welcome the potential of crypto-assets but recognize and address their risks.
- Develop and implement regulatory frameworks that ensure financial integrity and protect consumers in the crypto world as in the traditional financial sector.
- Leverage technology for the public good to harness potential while preventing illegal activity and financial vulnerability.
- Pursue close international cooperation given cross-border nature of crypto-assets.

Christine Lagarde — March 13, 2018