TL;DR Breakdown

• IMF raises alarm on threats caused by emerging crypto market.
• Body acknowledges that crypto market has its own positives.
• The organization called on regulators to begin finding solutions.

The International Monetary Fund (IMF) has raised the alarm on Friday that the emerging crypto market could threaten financial stability.

IMF said this in a blog post, noting that the advent of digital currencies in emerging markets could spark “cryptoization” of local economies, potentially undermining exchange and capital controls and upset financial stability.

Fabio Natalucci, Dimitris Drakopoulos, and Evan Papageorgiou, authors of the blog post, described the widespread crypto adoption as “cryptoization.”

They noted that crypto users are also at risk of the digital assets, especially outages experienced during periods of extreme market volatility. 

The IMF stated that although there are no negative effects of the outage now, their impact keeps growing as cryptocurrencies become more mainstream.

Highlighting the positives in the emerging crypto market

The global monetary body did not fail to highlight that cryptocurrencies come with certain positives.

“Crypto-assets offer a new world of opportunities: Quick and easy payments. Innovative financial services. Inclusive access to previously “unbanked” parts of the world. All are made possible by the crypto ecosystem, it wrote.

“But along with the opportunities come challenges and risks. The latest Global Financial Stability Report describes the risks posed by the crypto ecosystem and offers some policy options to help navigate this uncharted territory, it wrote.

Challenges with cryptocurrencies as highlighted by IMF

In the blog post, the IMF noted that the total market value of all the crypto assets surpassed $2 trillion as of September 2021, and the sector is flourishing, replete with exchanges, wallets, miners, and stablecoin issuers.

The body, however, stated that most of these entities lack strong operational, governance, and risk practices. It said that Crypto exchanges, for instance, have faced significant disruptions during periods of market turbulence.IMF highlighted high-profile hacks, noting that although these actions have not had a significant impact on financial stability but as crypto becomes mainstream, their implications continue to increase.

Other crypto challenges highlighted are:

• Customer protection.
• Reduction inability of central banks to implement monetary policy effectively.
• Financial stability risks.
• Threat to fiscal policy.

IMF call for Policy action

The IMF noted that firstly, regulators and supervisors need to be able to monitor rapid developments in the crypto ecosystem as potential risks they pose.

The body called for policymakers to enhance e cross-border coordination to minimize the risks of regulatory arbitrage and ensure effective supervision and enforcement.

It also told national regulators to prioritize the implementation of existing global standards among other ways out the body proposed.