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IMF chief urges policymakers to keep an open mind on cryptocurrencies

Christine Lagarde, managing director of the International Monetary Fund (IMF) has urged policymakers to keep an open mind on cryptocurrencies and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit.

“A clear-eyed approach can help us harness the gains and avoid the pitfalls of the new crypto-assets landscape,” she noted.

In an article published on the IMFblog Monday, April 16, 2018, she wrote that the dizzying gyrations of crypto-assets such as Bitcoin invite comparisons with the tulip mania that swept Holland in the 17th century and the recent dot-com bubble, adding that with more than 1,600 crypto-assets in circulation, it seems inevitable that many will not survive the process of creative destruction.

“In my blog last month, I looked at the dark side of crypto-assets, including their potential use for money laundering and the financing of terrorism. Here, I want to examine the promise they offer. A judicious look at crypto-assets should lead us to neither crypto-condemnation nor crypto-euphoria,” she wrote.

Lagarde affirmed that just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto-assets that survive could have a significant impact on how we save, invest and pay our bills.

“That is why policymakers should keep an open mind and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit. This was one of the points I made in a speech at the Bank of England last year,” she remarked.

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She listed some of the potential benefits to include fast and inexpensive transactions, elimination of intermediaries, and transaction efficiency.

“Crypto-assets enable fast and inexpensive financial transactions, while offering some of the convenience of cash,” she pointed out, saying that some payment services now make overseas transfers in a matter of hours, not days.

She wagered that if privately issued crypto-assets remain risky and unstable, there might be demand for central banks to provide digital forms of money― “an idea we explore in the forthcoming Global Financial Stability Report.”

Lagarde highlighted that the underlying technology of crypto-assets—distributed ledger technology, or DLT—could help financial markets function more efficiently.

“Self-executing and self-enforcing “smart contracts” could eliminate the need for some intermediaries. Already, the Australian Securities Exchange has said it plans to use DLT to manage the clearing and settlement of equity transactions,” she wrote, adding that secure storage of important records is another promising use for DLT. She noted that healthcare companies are studying how to use the technology to maintain confidential medical data while providing access to insurers and other authorized users.

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“In developing economies, such advances can help secure property rights, increase market confidence and promote investment. In Ghana, where property ownership is often the subject of disputes, a DLT-based platform called Bitland promises to help solve the problem by securely recording land sales.”

She, therefore, urge a better balance in viewing cryptocurrencies.

“In my view, the fintech revolution will not eliminate the need for trusted intermediaries, such as brokers and bankers. There is hope, however, that decentralized applications spurred by crypto-assets will lead to a diversification of the financial landscape, a better balance between centralized and de-centralized service providers, and a financial ecosystem that is more efficient and potentially more robust in resisting threats,” she canvassed.

“What are the implications for financial stability? Our preliminary assessment is that, given their still-small footprint and limited links to the rest of the financial system, crypto-assets do not pose an immediate danger. Even so, regulators should remain vigilant: crypto-assets have the potential to magnify the risks of highly leveraged trading, and to increase the transmission of economic shocks should they become more integrated into mainstream financial products.”

She highlighted banks and other financial institutions will face challenges to their business models should there be a large-scale shift away from government-issued currencies toward crypto-assets, adding that regulators might find it harder to ensure the stability of a more diffuse and decentralized financial system.

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“Central banks might have more trouble acting as the lender of last resort in case of a crisis,” she said.

Lagarde however pointed out that before crypto-assets can transform financial activity in a meaningful and lasting way, they must earn the confidence and support of consumers and authorities.

She said an important initial step will be to reach a consensus within the global regulatory community on the role crypto-assets should play and the fact that crypto-assets know no boundaries, international cooperation will be essential.

“Here, the IMF, with a membership of 189 countries, can play a key role by offering advice and serving as a forum for discussion and collaboration in the development of a consistent regulatory approach,” she noted, adding that for this to happen, “we must keep abreast of rapid developments in markets and technologies. We must act quickly to close the knowledge gaps that inhibit the effective monitoring of crypto-assets. There should be systemic risk assessment and timely policy responses, as well as measures to protect consumers, investors, and market integrity.”

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