The IMF's attitude towards cryptoasset regulation has evolved

Depth | Author | TaxDAO

In recent years, crypto assets and their underlying technology, blockchain, have attracted widespread attention around the world, bringing challenges not only to traditional financial markets, but also to governments and international organizations to bring regulatory problems. The International Monetary Fund (IMF), as an authoritative organization in the global financial field, has been paying attention to the development of financial technology and its impact on the global financial system. Its relationship with crypto assets is more complicated: on the one hand, the IMF, as a product of the Bretton Woods system, can “influence” the economic policies and even economic systems of the recipient countries through conditional economic assistance, and some developing countries sometimes feel “oppressed by the IMF ruling and neoliberal dogma” and try to “escape the control of the IMF” by replacing fiat currencies with cryptocurrencies; On the other hand, crypto assets will affect the economic stability of developing countries with weak economies to a certain extent, so it is necessary to establish a sound regulatory system. In this context, the IMF’s regulatory attitude towards crypto assets is of special significance and has gradually become the focus of attention inside and outside the industry. This article will use this as a starting point to review the evolution of the IMF’s cryptoasset regulatory documents and discuss the development of cryptoasset regulatory policies in the “post-winter era”.

I. Initial Attention and Assessment

In 2013, the IMF released its first report on virtual currency, which conducted an in-depth discussion of the concept, characteristics, potential risks and regulatory issues of virtual currency. The report defines a virtual currency as: “a digital asset that is secured with cryptography and transacted using a peer-to-peer network.” And further pointed out that virtual currencies do not rely on any central authority for issuance and regulation, but are issued and verified through the consensus mechanism of computer networks. This decentralization makes virtual currencies censorship-resistant, low-cost, and high-efficiency. The report analyzes the impact of virtual currencies on financial stability, monetary policy, financial innovation, and more, and also discusses the regulatory challenges associated with virtual currencies. Due to the popularity and rapid development of virtual currencies, regulators need to take swift steps to regulate this market. However, the cross-border and decentralized nature of virtual currencies makes regulation difficult. Countries should formulate corresponding regulatory policies according to the characteristics and risks of virtual currencies. This includes regulating the issuance, trading, and storage of virtual currencies to prevent them from being used for illegal activities such as money laundering and terrorist financing. At the same time, the IMF also encourages countries to take into account the innovation and potential positive impact of virtual currencies when formulating regulatory policies.

Subsequently, for the first time, the IMF devoted a chapter to the Financial Stability Report to discuss the impact of crypto assets on financial stability. The report notes that while the cryptoasset market is relatively small, they can have an impact on financial stability, especially when risks arise in financial markets. Policymakers should pay attention to the risks of the cryptoasset market and adopt appropriate policy and regulatory measures to ensure the stable development of the market.

With the development of crypto assets, the IMF further published a new report in 2015 that further expanded and deepened the concept of virtual currency. The IMF states that a digital currency is “an asset that exists in digital form and can be used as a means of payment and a store of value.” Moreover, the IMF divides digital currencies into three categories: central bank digital currencies (CBDCs), stablecoins, and other crypto-assets (OCAs). The report provides a detailed analysis of the impact of these three types of digital currencies. Since cryptocurrencies are not issued by governments or central banks, they are not subject to traditional monetary policy. The report states that if cryptocurrencies are widely adopted, they may affect the measurement of the money supply and the effectiveness of monetary policy implementation. Additionally, cryptocurrencies may have an impact on financial stability, as they may be used for illegal activities such as money laundering and terrorist financing.

II. Attention and Confidence in Crypto Asset Innovation

During this phase, the IMF published a number of reports and articles focusing on innovation in the cryptoasset space. For her part, IMF Managing Director Christine Lagarde showed great confidence in the development of cryptoassets: “I think the adoption of digital currencies will be in the interests of financial institutions”, and “I would be very surprised if many existing financial institutions did not adopt these tools in five years.” ”

In 2016, the IMF published a paper on virtual currencies, which provided a detailed analysis of virtual currencies, distinguishing them from other digital currencies and stating for the first time that virtual currencies do not conform to the legal concept of money. Because the legal concept of money is related to the sovereignty that establishes a legal framework that governs the issuance of money and regulates the monetary system. The paper also points out from a functional perspective that virtual currencies cannot perform currency-related functions due to price fluctuations, limited acceptance due to lack of fiat currency status, and lack of evidence that they are an independent unit of account. In addition, the paper distinguishes between distributed ledger systems and centralized payment systems, and points out that distributed ledgers have the power to revolutionize the financial sector by reducing costs and deepening financial inclusion in the long run.

In 2017, the IMF released a report on the development of the fintech industry, with a particular focus on the fast-growing cross-border payments industry, and recommendations on how to effectively regulate distributed ledger technology and digital currencies using this technology. “New technologies may require jurisdictions to revise rules on ownership and contractual rights and obligations,” the report stresses. It also recommends the adoption of stricter know-your-customer information guidelines and regulatory standards to deter money laundering, tax evasion and terrorist financing.

In 2018, the IMF published an article titled “Solving the Dark Side of the Crypto World,” which argued that the first focus could be on policies that ensure financial integrity and protect consumers in the crypto world, as it has done for the traditional financial sector. For the first time, the IMF has made it clear that since cryptoassets know no borders and no country can meet the challenges alone, the regulatory framework must also be global. It would be unwise to abandon cryptoassets, and their potential must be welcomed by working together and using technology for the public good, but also recognizing their risks, ensuring that they never become a haven for illegal activities or a source of financial vulnerability. The IMF will play its part in this effort, with its near-universal membership and expertise, including in countering money laundering and terrorist financing, as a forum to help find answers in the evolving cryptoasset space.

In 2019, the IMF published an article titled “The Rise of Digital Currencies,” which analyzed how cryptoasset companies compete with large banks and credit card companies. The article affirms that digital currencies may flourish under the advantages of convenience, universality, complementarity, low transaction costs, trust and network effects. At the same time, it highlighted the possible regulation of widespread adoption, as well as the risks associated with digital currencies: the possibility of new monopolies, threats to weak currencies, concerns about consumer protection and financial stability, and the risk of fueling illegal activities. Especially in countries with high inflation and weak institutions, crypto assets can be more attractive. The article also points out that virtual asset service providers (VASPs) such as cryptocurrency exchanges struggle to comply with anti-money laundering (AML) and countering terrorist financing (CFT) regulations scattered across jurisdictions when assets are backed by decentralized technology and stakeholders. The article also offers some solutions: in order to prevent the formation of monopolies and protect monetary policy, central banks can play a role in providing central reserves for stablecoin issuers, and can also consider issuing their own digital currencies. At the same time, the central bank can grant licenses under regulatory conditions and require service providers to be responsible for customer screening, transaction monitoring, and reporting of suspicious activity under Know Your Customer (KYC), anti-money laundering, and anti-terrorist financing regulations, as well as setting industry standards for the security of crypto wallets and customer data.

III. Caution after the “Cold Winter”: The Concretization and Globalization of Regulation

As the crypto asset industry suffers a “cold winter”, the IMF has become more cautious. In 2021, the IMF published an article titled “The Rise of Public and Private Digital Currencies: Strategies to Continue the IMF’s Mission,” which affirmed the fast, simple, efficient, and inclusive benefits of digital currencies, and that policymakers need to accelerate the pace in order to increase returns and manage risks, given their broad and profound impacts: first, digital currencies must remain trustworthy, they must protect consumers, ensure security, Built within a sound legal framework and supported by financial integrity, secondly, domestic economic and financial stability must be protected through well-designed public-private partnerships, smooth transitions of banking roles and fair competition, digital currencies should be designed to support climate sustainability and effective fiscal policies, and thirdly, the international monetary system should remain stable and efficient, and digital currencies must be designed, regulated and made available so that countries can maintain a clear understanding of monetary policy, financial conditions, Capital account liberalization and control of the foreign exchange system, payment systems must be increasingly integrated and applicable to all countries, rather than fragmented, and digital divides need to be avoided;

The IMF stressed that low-income countries and emerging market developing countries with less digital capabilities will need timely advice and capacity development assistance in key macro areas of relevance to these countries. At this stage, the IMF will focus more on the development of analytical frameworks and multilateral surveillance and capacity development, and will pilot or limit the coverage of the issue in bilateral surveillance.

In the same year, the IMF said in the Global Financial Stability Report that the adoption of cryptoassets and stablecoins in emerging market and developing economies could pose a challenge to the macroeconomic and financial stability of these countries. Although the risk is “currently under control”, regulators still need to monitor cryptocurrencies and control them. The IMF considers the areas at risk of hacking are the “lack of transparency in the issuance and distribution” of tokens, as well as operational risks, including disruptions during periods of extreme volatility.

In a series of reports, the IMF acknowledged that cryptoassets are no longer on the fringes of the financial system, noting that “given the relatively high volatility and valuation of cryptocurrencies, their increasing linkage may soon pose a risk to financial stability,” and the experts further called for a coordinated global regulatory framework “to guide national regulation and oversight and mitigate financial stability risks posed by the crypto ecosystem.” ”

In January 2022, the IMF demanded that El Salvador abandon its policy of making BTC legal tender, and in May it pressured Argentina to restrict trading in crypto assets on the condition of extending the loan. It then warned the Marshall Islands that recognizing digital currencies as legal tender could “increase risks to macroeconomic and financial stability and financial integrity.” This series of cautious and pessimistic actions has led to the realization that the multilateral institution, which serves some 190 countries, may have a more nuanced view of cryptocurrency. The president and co-founder of ProChain Capital claims that “I do believe that the IMF is a die-hard enemy of cryptocurrency” and that given that BTC and other cryptocurrencies are “issued” by non-state entities and have no borders, “cryptocurrencies have the potential to be ubiquitous, which could significantly reduce the need for the IMF, the UN financial institution”.

But in the Regulating Cryptocurrencies report released in September, the IMF did not seem to have any objections to the existence or even proliferation of non-government digital currencies. In fact, it called for the establishment of a “global regulatory framework” for cryptocurrencies in order to bring order to the market “and provide a safe space for continued useful innovation.” The IMF’s comments on the Marshall Islands and El Salvador concern the adoption of cryptocurrencies as legal tender by national governments even when their unit of account currencies are already in place. And most of these negative opinions focus on the macroeconomic impact of tying the fiscal wagon to cryptocurrency. Institutionally, “the IMF is really skeptical of cryptocurrencies and has cracked down on El Salvador,” Josh Lipsky, senior director of the Atlantic Council’s Center for Geoeconomics, argues, but that’s because the organization is concerned about the financial fragility of the country’s economy: if El Salvador doesn’t meet its international debt servicing obligations, the IMF “will have to bail them out.”

Given that NGOs like the IMF and the World Bank, broadly speaking, have a mission to support global financial stability and stimulate economic growth in developing countries, there may be a natural tension over decentralized currencies. Because decentralized currencies tend to be volatile, hard-to-control financial instruments with no exact address or even an identifiable responsible person. As scholars have noted, the IMF is often called upon to deal with economies that are “plagued by corruption, incompetent leadership, and illusory money,” and as a result, it really “has no incentive to add another ‘no-issuer’ currency.” However, the IMF cannot ignore the reality that the future will be full of cryptocurrencies.

In 2023, the IMF released a series of research reports, and TaxDAO has compiled the main research reports (click on the link in the article to jump). In February, the IMF released Effective Policy Elements for Cryptoassets, which reaffirmed the principle of “same activities, same risks, same regulation” and developed a framework of nine policy principles to address macro-financial, legal and regulatory, and international coordination issues. In its Global Financial Stability Report released in April, following the collapse of crypto companies such as FTX and the subsequent collapse of crypto-friendly banks such as Silicon Valley, the IMF reiterated its call for “comprehensive, consistent and adequate regulation” and said it would impose “strict prudential requirements” on the regulation of entities in the cryptoasset ecosystem. In July, the IMF published a working paper on cryptocurrency taxation, noting that the current tax system lacks coherence, clarity, and effectiveness that can be adapted to cryptoassets, as they are not structured with cryptoassets in mind. In addition, they need to do so on the basis of limited information in the context of continuous, rapid and complex innovation, while balancing the core objectives of ensuring tax efficiency, equity and revenue with the risk of stifling innovation. In September, the IMF and the FSB released a joint report on cryptoassets, which identified the risks that cryptocurrencies may pose to macroeconomic and financial stability, and proposed a roadmap for policy recommendations.

With the gradual recovery of the crypto-asset industry and the establishment of regulatory policies for crypto-assets in various countries, the IMF plays an important role in guiding countries to establish regulatory policies by virtue of the universality of its members and the professionalism of its organization. But in the face of disparities in economic development levels and differences in regulatory attitudes and capacities around the world, striking a balance between prudence and the ambitious goal of seeking regulatory leadership will be a major test for the IMF.

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