The directors of the International Monetary Fund, Tobias Adrian, Dong He and Aditya Narain, have presented a proposal to the Financial Stability Board of the multilateral financial organization to develop a global framework of the regulation of Bitcoin and other cryptocurrencies to be carried out as soon as possible.
According to the proposal, “the objective should be to provide a comprehensive and coordinated approach to managing risks to financial stability.” It largely seeks to exercise greater control over the operations of the cryptocurrency market worldwide.
They consider that the Financial Stability Board, in fulfilling its coordination functions, must “develop a global framework that includes standards for the regulation of crypto assets.”
The three officials contend that the cross-sectoral, global nature of cryptocurrencies “limits the effectiveness of national approaches” to their regulation. They further assert that the adoption of different strategies across the world’s nations to regulate crypto could prevent comprehensive coverage of digital assets.
Likewise, they highlight that the companies which provide encryption services operate internationally, making the task of supervision, and the application of regulatory measures, difficult. Consequently, such uncoordinated regulatory measures only catalyze a process of “potentially destabilizing capital flows.”
IMF officials referred to the updated guidelines from the Financial Action Task Force () to regulate bitcoin, whose approach is based on the risk of digital assets and service providers, clarifying that, although these and other institutional initiatives are “useful” to attack the problem, “they are not sufficiently coordinated towards a global framework to manage risks against financial and market integrity, financial stability and protection. of the consumer and investor.”
Towards Global Regulation
For loan officers, an ideal regulatory framework should contain at least three basic elements. First of all, companies operating in the trade of cryptocurrencies (i.e. exchanges, digital wallets etc.) must have an operating license similar to traditional banks.
The criteria for granting such licenses to provide storage, exchange, transfer and payment services, among others, “must be clearly articulated.” At the same time, “the responsible authorities must be clearly designated,” and have well-defined coordination mechanisms.
Secondly, these requirements must be tailored “to the main crypto asset and stablecoin use cases.” The experts underlined that “investment services and products must have requirements similar to those of brokers and securities agents, supervised by the securities regulator.”
They indicate that regulatory authorities “from central banks to securities and banking regulators – need to coordinate to address the various risks arising from different and changing uses.”
The third element proposed by Tobias Adrian, Dong He and Aditya Narain, is that “authorities should provide clear requirements to regulated financial institutions regarding their exposure and commitment to cryptocurrencies.”
They suggest that regulators of the banking sector, securities, insurance and pension funds, “should stipulate capital and liquidity requirements and exposure limits to different types of these assets, and require risk and suitability assessments of investors.”
If regulated companies provide custody services, the requirements surrounding such endeavors will have to be clarified, so that the alleged risks that arise from that function are addressed, they emphasized.
They explain that “some emerging markets and developing economies” face “more immediate and acute risks of currency substitution through crypto assets, the so-called cryptoization.” Therefore, “capital flow management measures will have to be adjusted vis-a-vis cryptocurrencies.”
They added in the proposal, that “this is because the application of established regulatory tools to manage capital flows can be more challenging when value is transmitted through new instruments, new channels and new service providers that they are not regulated entities.”
On the Flipside
- IMF experts emphasize that the organization’s mission is to safeguard the stability of the international monetary and financial systems in the face of the challenges and profound changes that crypto assets have given rise to.
In their brief, the three senior officials expressed that there is currently “an urgent need for cross-border collaboration and cooperation to address technological, legal, regulatory and supervisory challenges.”
Finally, they mention that “the Fund will work closely with the Financial Stability Board and other members of the international regulatory community to develop an effective regulatory approach for crypto assets.”
Why You Should Care
- Although it is not the first time that senior officials of multilateral organizations have proposed regulatory measures for Bitcoin and crypto at large, what sets this proposal apart is that it makes clear the role the IMF will play in regulating digital money.
- Cryptocurrencies are a reality that the international monetary system will have to adapt to, as the Fund’s chief economist, Gita Gopinath, has recognized.
- Precisely due to the rapid growth and adoption the industry has experienced over the last two years, the body also believes that, in order to regulate cryptocurrencies, it is vital to reach an international consensus on the regulatory approach.
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