Unbacked crypto assets pose financial and fiscal risks, warns IMF

Cryptocurrency assets, not backed by sovereigns, may threaten effectiveness of monetary policy, pose financial and fiscal risks, make capital flows volatile and will fragment global payments systems, a research paper by the International Monetary Fund, say.

The paper was presented to the G20 finance ministers and central bank governors in February in Bengaluru, and was made public on Monday.

“A widespread proliferation of crypto assets comes with substantial risks to the effectiveness of monetary policy, exchange rate management, and capital flow management measures, as well as to fiscal sustainability. Moreover, changes may be required to central bank reserve holdings, and the global financial safety net, yielding potential instability. Finally, banks may lose deposits and have to curtail lending,” the report stated.

The paper, which only focused on unbacked cryto assets, said that there could be some benefits, like better financial inclusion, spurring of private sector innovation, and that the underlying technology (like blockchain) could have many uses.

It added that the crypto asset market has grown in complexity and exhibited significant volatility, illustrated by the fact that the size of the crypto asset market has fluctuated dramatically, peaking to nearly $3 trillion in November 2021, before crashing to below $1 trillion today.

Policymakers are pushing for tighter policies including regulation, it said, adding that while crypto assets are not yet a significant part of the global financial system, they are becoming a source of systemic risk in certain jurisdictions.

“The widespread adoption of crypto assets could threaten the effectiveness of monetary policy. Monetary policy transmission would weaken if firms and households prefer to save and invest in crypto assets that are not pegged to the domestic fiat currency… Unbacked crypto assets and stablecoins without credible backing may pose financial stability risks due to their volatile prices. Stablecoins could also disintermediate banks.,” the paper stated.

It said that declaring a crypto asset legal tender may create fiscal risks as government revenues would be exposed to exchange rate risk if taxes are quoted in advance in a crypto asset while expenditures remained mostly in the local currency. Also crypto asset adoption can increase risks to public finances even without changing legal tender laws as pseudonymous crypto assets can undermine tax revenue collection and compliance.

Earlier this month, the central government brought crypto assets under the ambit of Prevention of Money Laundering Act. Last month, at the G20 meeting, IMF Managing Director Kristalina Georgieva backed India’s stance on private cryptocurrencies and other digital assets, and said that there is a need for a strong push on global regulation for such assets.

Indian officials in the government and the Reserve Bank of India have argued that while there is a need for strong global regulations for private crypto assets, banning should be an option in certain cases. Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das had said at the same event that India’s position was being endorsed by other nations.