IMF Warns That High Crypto Adoption Could Undermine Macro-Financial Stability, Calls For Regulation to Protect Risks

The International Monetary Fund (IMF), has expressed concerns about the high adoption of crypto assets across the globe, noting that it could undermine macro-financial stability, as it calls for necessary infrastructure & regulation to protect against risk.

While speaking at a conference in Seoul, South Korea, on digital currency, the Managing Director of IMF, Kristalina Georgieva emphasized the need to regulate cryptocurrencies, due to the impact on financial stability.

In her words,

“The challenge is that high crypto asset adoption could undermine macro-financial stability. It could affect the effectiveness of monetary policy transmission, capital flow management measures, and fiscal sustainability to volatile tax collection. Our goal is to make a more efficient, interoperable, and accessible financial system by providing rules to avoid the risks of crypto and infrastructure by leveraging some of its technologies.

“Rules are not meant to return us to the pre-crypto world, nor squash innovation, good rules can spur and guide innovation. For instance, banks are exploring new trading infrastructure using blockchain technology refined and popularized by the crypto boom. They hope to cut costs and speed for trillions of dollars of daily asset transactions, and to broaden financial access to those currently content with low yielding deposits accounts”.

In a panel discussion, Georgieva emphasized the need for policymakers  to actively participate in the process, contributing to its improvement, or risk being excluded, warning that countries should desist from adopting cryptocurrencies as a legal tender.

Also speaking on the topic of digital money,  Seoul’s finance minister Choo Kyung-ho noted that despite a series of challenges, a clear transition to digital money is already happening which is unstoppable.

He noted that the goal now is to establish a set of policy tools that not only support economic growth and financial innovation but also ensure reliability and stability.

Choo emphasized the need for every country and global institution to stay nimble to keep up with digital innovation and focus on solutions to build public trust and stability on top of the convenience and efficiency provided by digital money.

“Setting up global standards through close collaboration with governments and international bodies are essential, especially considering that digital money knows no borders,” he added.

The adoption rate of crypto across the globe has continued to increase significantly, which had seen businesses across the world now accepting crypto as a means of payments. In the U.S, more than 85% of merchants view enabling crypto payments as a high-priority.

As of September 2023, Chainalysis 2023 Global Crypto Adoption Index, reported that the estimated global crypto ownership rate was at an average of 4.2%, with over 420 million crypto users worldwide. India, Nigeria, and Thailand were ranked as the top three countries with lower middle-income (LMI) nations leading the way in the grassroots adoption of cryptocurrencies.

While crypto assets offer a new world of opportunities, such as driving global financial inclusion, albeit, it comes with high risk. The volatile nature of cryptocurrencies could lead to financial instability if not properly managed.

Financial Times reports that crypto assets have so far not reduced but rather amplified the financial risks in less developed economies.

The concern of the IMF centers on the fact that without adequate regulation, factors such as market fluctuations, security vulnerabilities, and potential illicit activities could jeopardize the broader financial system.

Hence, striking a balance between innovation and safeguarding macro-financial stability is seen as essential for a sustainable and secure financial environment in the face of increasing cryptocurrency adoption.