The International Monetary Fund [IMF] has said that the global boom of cryptocurrencies poses new problems for financial stability.
The IMF said this in a blogpost on Friday.
According to the body, the crypto ecosystem allows for quick and easy payments, innovative financial services, and inclusive access to the unbanked.
The IMF had said that the total market value of all the crypto assets had grown by 10-folds ($2tn) since 2020, with the ecosystem flourishing, replete with exchanges, wallets, miners, and stablecoin issuers.
The Monetary body also said that many of these entities lacked strong operational, governance, and risk practices.
The monetary body said, “Crypto exchanges, for instance, have faced significant disruptions during periods of market turbulence.
“There are also several high-profile cases of hacking-related thefts of customer funds.
“So far, these incidents have not had a significant impact on financial stability.
“However, as crypto assets become more mainstream, their importance in terms of potential implications for the wider economy is set to increase.
“Consumer protection risks remain substantial given limited or inadequate disclosure and oversight. For example, more than 16,000 tokens have been listed in various exchanges and around 9,000 exist today, while the rest have disappeared in some form.
“For example, many of them have no volumes or the developers have walked away from the project. Some were likely created solely for speculation purposes or even outright fraud. The (pseudo) anonymity of crypto assets also creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing.”
Crypto adoption is being driven by emerging markets and developing economies, with residents in these countries increasing their trading volumes in crypto exchanges in 2021, according to the IMF
The body said, “Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarization forces in the economy—or in this case cryptoization—where residents start using crypto assets instead of the local currency.
“Cryptoization can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks, for example, through funding and solvency risks arising from currency mismatches, as well as amplify the importance of some of the previously mentioned risks to consumer protection and financial integrity.
“Threats to fiscal policy could also intensify, given the potential for crypto assets to facilitate tax evasion. And seigniorage (the profits accruing from the right to issue currency) may also decline. Increased demand for crypto assets could also facilitate capital outflows that impact the foreign exchange market.”
According to the IMF, global regulators and supervisors need to start monitoring developments in the crypto ecosystem and the risks they create by tackling data gaps.
It added that the use of crypto in emerging economies was as a result of weak central bank credibility, vulnerable banking systems, inefficiencies in payment systems and limited access to financial services.