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(Kitco News) – The International Monetary Fund (IMF) and the Financial Stability Board (FSB) released a joint policy roadmap on Thursday that includes their policy recommendations to “identify and respond to macroeconomic and financial stability risks associated with crypto-assets.”
The roadmap was created at the request of the Indian G20 Presidency and was designed to “provide comprehensive guidance to help authorities address the macroeconomic and financial stability risks posed by crypto-asset activities and markets, including those associated with stablecoins and those conducted through so-called decentralized finance (DeFi),” the announcement said.
According to the report, the act of banning cryptocurrency won’t eliminate the risks involved, and “comprehensive regulatory and supervisory oversight of crypto-assets should be a baseline to address macroeconomic and financial stability risks.”
The paper also reviewed risks related to legal matters, financial integrity, and market integrity that crypto-asset activities pose to financial markets.
The roadmap developed by the IMF and FSB includes planned and ongoing work related to the implementation of crypto-asset policy frameworks, “which, taken together seek to: build institutional capacity beyond G20 jurisdictions; enhance global coordination, cooperation, and information sharing; and address data gaps necessary to understand the rapidly changing crypto-asset ecosystem.”
The standard-setters warned that the widespread adoption of crypto “could undermine the effectiveness of monetary policy, circumvent capital flow management measures, exacerbate fiscal risks, divert resources available for financing the real economy, and threaten global financial stability.”
“These risks could reinforce each other,” they said, “as financial instability can make maintaining price stability more difficult and vice versa; cause destabilizing financial flows; and strain fiscal resources.”
For these reasons, “A comprehensive policy and regulatory response for crypto-assets is necessary to address the risks of crypto-assets to macroeconomic and financial stability.”
Policy response recommendations to implications of crypto assets. Source: IMF/FSB
They advised jurisdictions to “safeguard monetary sovereignty and strengthen monetary policy frameworks, guard against excessive capital flow volatility and adopt unambiguous tax treatment of crypto-assets” to address the macroeconomic risks involved.
The recommendations and standards provided “apply the principle of ‘same activity, same risk, same regulation,’ establish a minimum baseline that jurisdictions should meet, and aim to address the set of issues common across the majority of jurisdictions,” the paper said.
To address risks to financial integrity and mitigate criminal and terrorist misuse of cryptocurrencies, they recommended that jurisdictions “implement the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing (AML/CFT) standards that apply to virtual assets (VAs) and virtual asset service providers (VASPs).”
FAFT adopted a roadmap to accelerate the global implementation of AML/CFT controls and supervision in the crypto-asset sector in February, “which will publicly identify the steps taken to implement the standard in jurisdictions with materially important crypto-asset activity in the first half of 2024,” the paper said.
The IMF and FSB said emerging markets and developing economies (EMDEs) may “want to take additional targeted measures that go beyond the global regulatory baseline to address specific risks,” and “may want to adapt these targeted measures to their country-specific circumstances, especially if they face elevated macro-financial risks from crypto-assets.”
Factors that can help determine the level of vulnerability to macro-financial risks posed by crypto-assets include the size of the economy and financial system; regulatory priorities; institutional quality and capacity; and the level of financial integration into the global economy.
“The implementation of these measures may vary across countries based on their unique circumstances and capacity constraints,” the paper said.
DeFi risks
On the topic of DeFi platforms, the paper said that while the processes used to provide DeFi services may be different from traditional financial platforms, DeFi “does not differ substantially from the traditional financial system in the functions it performs.”
“In attempting to replicate some of the functions of the traditional financial system, DeFi inherits and may amplify vulnerabilities, including operational fragilities, liquidity and maturity mismatches, leverage and interconnectedness,” they warned. “Claims of decentralization often do not hold up to scrutiny. Presently, DeFi may exhibit unclear, opaque, untested, or easy-to-manipulate governance frameworks that may expose users to risks.”
“The extent to which these vulnerabilities can lead to financial stability concerns largely depends on the interlinkages and transmission channels between DeFi, traditional finance and the real economy,” the paper said. “To date, these interlinkages are limited. However, if the DeFi ecosystem were to grow significantly, then the scope for spillovers would increase.”
The paper said that following the consultation period, the International Organization of Securities Commissions (IOSCO) “will review the feedback and finalize policy recommendations to address investor protection and market integrity risks in DeFi” by the end of 2023.
According to a report from Reuters, the proposed policy recommendations will be discussed at the leaders’ summit this weekend in New Delhi, and India has prepared a presidential note that will include a summary of the report.
A government source told Reuters that “The way forward will have to be put into effect by the IMF and the FSB for G20 countries,” and said, “a standard-setting body will be required for implementing the rules after the countries agree on them.” The official recommended the creation of “a common template” that “consists of certain measures that are well defined.”
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