Speaking of stopping cryptocurrency risks, we make five key recommendations in two FinTech memos, Regulation of the Crypto Asset Ecosystem: The Status of Unsupported Crypto Assets and Regulation of the Crypto Asset Ecosystem, and The Status and Arrangements of the Stable Digital Currency, both published in September. Past.
First, crypto asset service providers should be licensed, registered and accredited. This includes those that provide storage, transfer, swap, settlement and custody services, under rules such as those that govern service providers in the traditional financial sector. In particular, it is necessary to separate clients’ assets from those of the company and isolate their resources from other functions. Licensing and authorization criteria should be precisely defined, and the responsible authorities should be clearly assigned.
Secondly, entities that perform multiple functions should be subject to more precautionary requirements. If doing multiple jobs could create a conflict of interest, the authorities should consider whether this should be prohibited for such actors. If companies are allowed to perform multiple functions, and they do so, they should be subject to strict requirements of transparency and disclosure so that the authorities can identify their most prominent dependencies.
Third, stablecoin issuers should be subject to strict prudential requirements. Some of these tools are beginning to gain acceptance beyond cryptocurrency users, and are now being used as stores of value. If stablecoins are not properly regulated, they could weaken monetary and financial stability. Strong bank-style regulation may be needed, depending on the model and size of the stablecoin arrangement.
Fourth, clear terms should be in place to govern regulated financial institutions regarding their exposure to, and transactions in, crypto-assets. If these institutions provide custody services, terms should be clarified to address the risks arising from the performance of these functions. In this regard, we very much welcome the Basel Committee on Banking Supervision’s recent standard on the prudential treatment of banks’ exposure to crypto-asset risks.
Fifth, at the end of the day, we need robust, comprehensive, and consistent cryptocurrency regulation and oversight mechanisms globally. The cross-sector and cross-border nature of cryptocurrencies limits the effectiveness of uncoordinated national approaches. To be successful, the global approach must also be able to adapt to the changing landscape and risk horizons.
It will be difficult for authorities around the world to contain risks to users given the rapid development of crypto assets, while some countries are taking more aggressive steps. For example, in sub-Saharan Africa, which is the smallest but fastest growing region in cryptocurrency trading, about a fifth of its countries have put in place bans that somehow help reduce risks.
While broad bans may be disproportionate, we believe that fine-targeted restrictions produce better policy outcomes provided sufficient regulatory capacity is in place. For example, we can impose restrictions on the use of certain crypto derivatives, as Japan and the United Kingdom have done. We can also restrict cryptocurrency campaigns, as Spain and Singapore have done.
However, while setting global standards will take time, the FSB did well to make its recommendations on crypto assets and stablecoins. Our two financial technology notes come to many of the same conclusions, a testament to our close collaboration and shared market insights. For its part, the IMF will continue to work with global bodies and member states to help senior policymakers work on this issue to best serve individual users as well as the global financial system.
