How Policymakers Should Regulate Cryptoassets and Fintech - Straight Talk - IMF F&D Magazine

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How Policymakers Should Regulate Cryptoassets and Fintech - Straight Talk - IMF F&D Magazine

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Bibliographic details

• Authors: CHRISTINE LAGARDE
• Published: June 1, 2018

Fintech promise and observed applications

• Distributed ledger technology, like blockchain, underpins cryptoassets and "has the potential to improve our lives."
• Examples of fintech delivering financial services:
  • Mobile payment systems in Kenya and China have brought millions of previously "unbanked" people into the financial system.
  • Peer-to-peer lending in Latvia, Brazil, and elsewhere has opened up a new source of credit for small businesses.
  • Advances in artificial intelligence can enhance fraud protection, regulatory compliance, expand access to financial services, and deepen financial inclusion.
• Potential uses of distributed ledger technology highlighted:
  • Faster and cheaper transactions (from trading securities to remittances).
  • Secure storage of records such as diplomas and real estate deeds.
  • Automatic execution of "smart contracts."
• Acknowledged misuse:
  • The technology "has also been used for illicit purposes."

Risks and regulatory objectives

• Primary risks regulators must address:
  • Consumer and investor protection against fraud.
  • Combating tax evasion, money laundering, and the financing of terrorism.
  • Protecting the integrity and stability of the financial system.
  • Emerging cybersecurity risks.
• Regulatory trade-off: protect consumers and financial stability while avoiding stifling innovation that benefits the public.
• Recommended regulatory posture:
  • Constructively engage with market participants to stay abreast of benefits and identify emerging risks.
  • Develop a forward-looking regulatory framework requiring creativity, flexibility, and new expertise.
  • In some cases apply existing regulations; in others, design new approaches as distinctions between entities and activities break down.

Lessons from the financial crisis (three lessons)

• Lesson number one: "trust is the foundation of the financial system, but it is a fragile foundation that can easily be shaken."
  • Policy implication: ensure new technologies do not undermine trust.
• Lesson number two: "risk accumulates in unexpected places."
  • Policy questions raised: Will a more decentralized financial system be more stable, or less? Will risk be more dispersed? Will diminished role of traditional intermediaries mean emerging risks are more likely to go undetected?
• Lesson number three: "in a globalized world, financial shocks quickly reverberate across national boundaries."
  • Policy implication: responding to crises requires concerted global action; strengthen resilience and international cooperation.

Global coordination and current international work

• Risk of uncoordinated national responses: activity could migrate toward more lightly regulated jurisdictions in a "race to the bottom."
• International bodies and actions noted:
  • The Financial Action Task Force has provided guidance on addressing money-laundering and terrorist-financing risks associated with crypto assets.
  • The Financial Stability Board (FSB) is studying ways to monitor the growth of crypto assets to identify emerging threats to stability.
• G20 engagement:
  • In March, a meeting of G20 central bankers and finance ministers agreed with the FSB’s assessment that crypto assets do not currently pose a threat to stability.
  • The G20 also agreed that crypto assets could pose a threat at some point in the future and asked the FSB and other standard-setting bodies to continue their work and report on progress.

IMF’s role and operational approaches

• The IMF's comparative advantages:
  • Serve as a forum for exchange of ideas and a catalyst for forging consensus.
  • Monitor the economies and financial systems of its 189 members, help build institutional capacity, and offer advice on policies and regulatory structures.
  • Leverage a global perspective to understand and advise on fintech and cryptoasset risks and opportunities.
• Operational recommendations:
  • Understand innovative technologies, learn from them, and consider adopting some to improve regulation, supervision, and surveillance.
  • Do not delay action until all answers are clear; begin considering the regulatory framework of the future now.
  • Use regulatory "sandboxes" (examples cited: Hong Kong SAR, Abu Dhabi, and elsewhere) to test new financial technologies in closely supervised environments.
  • Maintain an open mind about crypto assets and financial technology because of both risks and potential to improve lives.

Key statements and rhetorical framing

• Historical analogy: 19th century anecdote of Alexander Graham Bell illustrates the disruptive and unpredictable nature of technological innovation.
• Central admonition: "We must guard against emerging risks without stifling innovation."
• Closing counsel: "When in doubt, just think of Alexander Graham Bell and his telephone."

Christine Lagarde, "A Regulatory Approach to Fintech," June 2018 — Straight Talk, F&D Magazine (author is a former IMF managing director).

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