An Even-handed Approach to Crypto-Assets

IMF Blog, April 16, 2018

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Author: Christine Lagarde
Date: April 16, 2018
Key framing: Neither “crypto-condemnation” nor “crypto-euphoria”; call for an even-handed regulatory framework that minimizes risks while allowing innovation.

There are more than 1,600 crypto-assets in circulation.
Crypto-assets exhibit "dizzying gyrations" and invite historical comparisons (tulip mania, dot-com bubble), implying many will not survive creative destruction.
Potential dark-side risks previously noted include money laundering and the financing of terrorism.
Preliminary IMF assessment: given their still-small footprint and limited links to the rest of the financial system, crypto-assets do not pose an immediate danger.
Risk channels and concerns:
- Potential to magnify risks of highly leveraged trading.
- Possibility of increased transmission of economic shocks if crypto-assets become more integrated into mainstream financial products.
- Challenges to banks’ and other financial institutions’ business models if there is a large-scale shift away from government-issued currencies toward crypto-assets.
- Regulators may find it harder to ensure stability in a more diffuse and decentralized financial system.
- Central banks could face more difficulty acting as lender of last resort in a crisis.

Fast, inexpensive financial transactions; some services already enable overseas transfers in a matter of hours rather than days.
If privately issued crypto-assets remain risky and unstable, there may be demand for central banks to provide digital forms of money (noted as an idea explored in the Global Financial Stability Report).
Distributed ledger technology (DLT) could:
- Help financial markets function more efficiently.
- Enable self-executing and self-enforcing “smart contracts” that could eliminate the need for some intermediaries (example: Australian Securities Exchange plans to use DLT to manage clearing and settlement of equity transactions).
- Provide secure storage of important records (example: healthcare companies studying DLT to maintain confidential medical data while providing access to insurers and authorized users).
- In developing economies, help secure property rights, increase market confidence, and promote investment (example: Bitland in Ghana uses a DLT-based platform to securely record land sales).

Fintech revolution will not eliminate the need for trusted intermediaries (brokers, bankers).
Decentralized applications spurred by crypto-assets may:
- Lead to diversification of the financial landscape.
- Produce a better balance between centralized and decentralized service providers.
- Create a financial ecosystem that is more efficient and potentially more robust in resisting threats.

Adopt an even-handed regulatory agenda that:
- Protects against risks without discouraging innovation.
- Distinguishes between real threats and needless fears through clear-eyed assessment.
Key actions for authorities and the IMF:
- Reach a consensus within the global regulatory community on the role crypto-assets should play; international cooperation is essential because crypto-assets know no boundaries.
- IMF role: offer advice and serve as a forum for discussion and collaboration (IMF membership: 189 countries).
- Keep abreast of rapid developments in markets and technologies.
- Act quickly to close knowledge gaps that inhibit effective monitoring of crypto-assets.
- Conduct systemic risk assessment and timely policy responses.
- Implement measures to protect consumers, investors, and market integrity.

A judicious, evidence-based approach can harness the gains of crypto-assets while avoiding pitfalls; authorities should be vigilant but open-minded to allow the creative process to bear fruit.

Source: IMF blog post "An Even-handed Approach to Crypto-Assets" by Christine Lagarde, April 16, 2018.

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