IMF’s Discussion of How Crypto Should Be Regulated Sparks Fear of a Total Ban

On Thursday (23 February 2023), the International Monetary Fund (IMF) issued a press release on crypto assets that has some crypto enthusiasts worried.

The IMF, established on 27 December 1945, “works to achieve sustainable growth and prosperity for all of its 190 member countries” by “supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being.”

According to the IMF’s press release, on 8 February 2023, the Executive Board of the International Monetary Fund (IMF) discussed a board paper on “Elements of Effective Policies for Crypto Assets.” This seems to have resulted in mixed reactions from the crypto community. Although a few welcome the guidelines and see them as a step towards greater legitimacy and acceptance of crypto, others fear that the IMF’s ultimate goal may be to clamp down on and even ban cryptocurrencies altogether.

This paper proposes a framework consisting of nine key elements of effective policies for crypto assets that member countries should adopt, including safeguarding monetary sovereignty, analyzing and disclosing fiscal risks, and developing prudential, conduct, and oversight requirements for all crypto market actors.

Regarding a future potential ban on crypto, the press release said:

“Directors agreed that strict bans are not the first-best option, but that targeted restrictions could apply, depending on domestic policy objectives and where authorities face capacity constraints. A few Directors, however, thought that outright bans should not be ruled out.”

The major concern of the crypto community appears to be that the IMF wants greater control over crypto and, ultimately, a crypto ban, possibly due to its fear of crypto either jeopardizing the stability of the global monetary system or successfully bypassing it entirely. Another concern is that by requiring member countries to adopt these policies, the IMF could stifle innovation in the crypto space and make it harder for new and smaller players to enter the market.

Critics of the IMF’s guidelines also argue that the paper fails to recognize the potential benefits of crypto and blockchain technology, such as financial inclusion and greater transparency. They also point out that the paper does not adequately address issues related to the adoption of crypto assets by developing countries, which could be seen as a missed opportunity to promote financial inclusion in these regions.

While the IMF’s paper is not legally binding, it could serve as a model for member countries’ policies on crypto assets. As the crypto industry continues to evolve and gain greater mainstream acceptance, it remains to be seen how the IMF’s guidelines will impact the future of cryptocurrencies and the regulatory landscape in which they operate.

Last June, the IMF’s managing director, Kristalina Georgieva, shared her thoughts on crypto assets in general and stablecoins and central bank digital currencies (CBDCs) in particular.

The IMF Chief’s comments about crypto were made on May 23 while she was speaking at a panel titled “Central Bank Digital Currencies” (moderated by CNN International anchor and correspondent Julia Chatterley)

The IMF chief had this to say about crypto:

“Well, when somebody promises you 20% return on something that is not backed by any assets, how would we normally call this thing? We would call it a pyramid; in other words, this is a pyramid in the digital age, but we should not be mistaken to immediately classify everything in the digital money world in a negative way because there are three categories.

“The first one is central bank digital currencies. They are backed by the state, and they offer finality when transactions are settled. This is a universe that, as you said, 90% of countries are exploring. Who crossed the finish line first? The Bahamas with the Sand Dollar, but now we have Nigeria stepping there. And there are many pilots, of which the largest universe of a pilot, which actually made me wake up and say ‘well, this thing is moving so fast that the international monetary fund has to embrace it’… China, a pilot with 128 million participants.

“Now the second group — these are the stablecoins. Some of them deserve the name because they are backed by assets, and when they’re backed by assets 1:1, they’re really stable. They look a little bit like many market funds, but they are money market funds in this digital space.

“And then we have a lower degree of stability. The less there is a backing, the more you should be prepared to take the risk of this blowing in your face, which is what happened some days ago. I want to be very, very direct that I do feel for the people who lost money because part of the reason they lost money is not really being well-educated on this new investment world.

“And I want to go to the third universe, the crypto that is really not pretending to be backed up by anything, not designed to be backed up by anything. It is really the trust that is built in a way that brings value. It is an investment class… I get occasional hate tweets when I say that Bitcoin maybe called a coin, but it’s not money.

“Why? Because a prerequisite for something to be money is to be a stable store of value. So, you actually can turn around it, and when the first country embraced Bitcoin and I was asked, ‘what did we think at the fund?’, I said, ‘well, it’s a sovereign decision, doesn’t make it a good decision’…

“So, my point here is that there are very important responsibilities for the central banks and also for other regulators — regulators of financial services, regulators of this asset class — to make sure that everybody can step into this world with some confidence, that we understand that for CBDCs the biggest question is interoperability, how are they going to connect to each other, but for stablecoins, for crypto assets, it is responsibility for some regulation and financial education.

“I would beg you not to pull out of the importance of this world because of what Julia said it — it offers us all faster service, much lower cost, and more inclusion, but only if we separate apples from oranges and bananas, and that is our job. We have a huge responsibility to do it well.“

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