The Changing Landscape of Crypto Assets—Considerations for Regulatory and Supervisory Authorities

IMF News, February 23, 2024

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Published: February 23, 2024

Key messages and purpose

Crypto assets have implications for macroeconomic and financial stability that are mutually interactive and reinforcing.
A comprehensive policy and regulatory response is necessary to address the risks of crypto assets.
The IMF seeks to help member countries implement the FSB Global Regulatory Framework for Crypto Asset Activities.

Macro and financial stability implications

While crypto markets do not currently pose a risk to financial stability in most jurisdictions, adoption of crypto assets tends to be higher in emerging markets and low-income jurisdictions.
Widespread adoption of crypto assets in these countries could:
- undermine the effectiveness of monetary policy;
- circumvent capital flow management measures;
- exacerbate fiscal risks;
- divert resources from financing the real economy.
Rapid growth of stablecoins denominated in foreign currencies in many emerging economies requires careful understanding of risks:
- Many emerging economies lack effective legal and regulatory oversight.
- Many emerging economies lack legal provisions for “bankruptcy remoteness,” meaning reserve assets can be commingled and not be secured if the issuer or its affiliates fail.
- Reserve assets tend to be managed by custodians located in advanced economies, which can create capital outflows from local banks to those custodian-managed reserve assets.
- Such outflows could potentially trigger higher volatility of the local currency and exert pressure on macroeconomic growth.
Regulation and supervision of crypto asset issuers and service providers does not directly solve macroeconomic and financial stability issues, but establishing and effectively implementing regulation and supervision is an important foundation for:
- better data collection;
- effective capital flow measures;
- fiscal and tax policies.

IMF work, prior analyses, and standards engagement

October 2021: IMF shared emerging thoughts on crypto impact on macroeconomic stability through the Global Financial Stability Report and explored the concept of “cryptoization.”
~a year ago: IMF published a policy paper endorsed by the Executive Board on elements for effective crypto policies and a note to the G20 on macrofinancial implications of crypto assets.
September 2023: IMF worked with the FSB secretariat to produce the IMF-FSB Synthesis Paper: Policies for Crypto-Assets, describing how IMF and FSB frameworks fit together.
The establishment of robust global standards, including the two FSB high level recommendations on regulation and supervision of crypto assets, will help guide IMF surveillance more effectively and efficiently.

Crypto challenges for resource-constrained authorities

Crypto market activities often mirror traditional financial services but are delivered using distributed ledgers, posing novel regulatory and supervisory challenges.
Technical layers and supervisory implications:
- Deeper layers of distributed ledger technology (network and consensus layers) ensure a single, sequenced, standardized, and cryptographically-secured record.
- It is not practical for regulators to have technical expertise in building and maintaining blockchain networks, yet understanding fundamentals and trade-offs of consensus mechanisms is important.
Data and skills constraints:
- Accessing and monitoring pseudonymous blockchain data is challenging for non-experts.
- In many emerging economies, there is a lack of available skills to build and maintain blockchain monitoring tools.
- Some authorities partner with blockchain analytics firms, but supervisors must understand the strengths and limitations of blockchain analytics tools.

Supporting countries through surveillance and capacity development

The IMF leverages near-universal membership to work with advanced, emerging, and low-income countries to:
- understand how crypto might impact financial markets and economies;
- listen to concerns and observations, identify risks, and analyze capacity to respond.
Use of information gathered:
- helps close data gaps;
- assists authorities in prioritizing responses among competing tasks.
Publications and capacity outputs:
- Fintech Notes on regulating crypto ecosystem and a supervisory primer on blockchain consensus mechanisms were disseminated to share best practice before implementation of global standards.
Surveillance and FSAP engagement:
- The IMF’s Financial Sector Assessment Program (“FSAP”) started pilot exercises in 2018 to cover fintech and crypto assets issues.
- Over the past several years, reviewing crypto regulation has been part of financial sector assessments for Hong Kong, Ireland, Singapore, Switzerland, and the United States.
- Last year, the IMF conducted an FSAP on regulation and supervision of crypto assets in Kazakhstan, its first standalone crypto workstream as part of an FSAP.
- When crypto assets fall within the scope of these assessment programs due to potential systemic impact, implementation of corresponding recommendations will be evaluated and focus on highlighting implementation gaps.
Capacity development channels:
- Regional training programs: together with regional training and capacity development centers, courses on fintech regulation (including crypto regulation) provide practical guidance on implementing standards from the FSB, the Basel Committee on Banking Supervision, and IOSCO.
- The FSB secretariat has delivered a session at each course since finalization of the high-level recommendations; IOSCO officials are expected at future fintech courses.
- Over the past 12 months we have reached over 250 individual supervisors from around 60 different regulatory authorities.
- Bilateral technical assistance: over the past 12 months, IMF provided assistance on crypto regulation to jurisdictions across Asia, Africa, and the Americas involving multi-month engagement with industry, government departments, and stakeholders to ensure implementation consistent with global standards.

Conclusions and recommendations for authorities

Remain vigilant to growth of crypto asset markets and their interlinkages with incumbent financial institutions.
Establish and effectively implement regulation and supervision as a foundation for:
- improved data collection;
- effective capital flow management;
- fiscal and tax policy responses.
Enhance understanding of distributed ledger technology fundamentals and consensus mechanism trade-offs among supervisors.
Build capacity through regional training and bilateral technical assistance to implement FSB and standard-setting body recommendations.
Leverage global standards and IMF-FSB cooperation to guide surveillance, assessments, and prioritization of regulatory responses.

Source: IMF speech “The Changing Landscape of Crypto Assets—Considerations for Regulatory and Supervisory Authorities,” IMF-FSB-OCC Crypto Conference, February 23, 2024.

Content in this bundle

CHAPTER 2 THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES
- CHAPTER 2 THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES (Markdown version)
- CHAPTER 2 THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES (PDF)
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- Normal (Markdown version)
- Normal (PDF)
IMF-FSB Synthesis Paper: Policies for Crypto-Assets
- IMF-FSB Synthesis Paper: Policies for Crypto-Assets (Markdown version)
- IMF-FSB Synthesis Paper: Policies for Crypto-Assets (PDF)