With an acceleration in “cryptoization” of emerging market currencies, the International Monetary Fund (IMF) is calling for capital controls for cryptocurrency businesses. The agency issued a report Tuesday that outlined measures for instituting regulation on the emerging asset class.
Crypto: A Threat to Global Financial Stability
As a result of the “cryptoization,” trading volumes for cryptocurrencies against those for emerging markets spiked following Russia’s invasion of Ukraine. The daily trading volume for Bitcoin versus the Russian Rouble and Ukraine’s Hryvnia spiked after Feb. 24. The BTC-Rub trading pair volume jumped by 121%, “magnitudes greater” than the BTC/USD pair, according to some researchers. According to the report’s authors, the biggest increase in trading volume against cryptocurrencies has been in Turkey, whose economy suffers from rampant inflation and exchange rate volatility.
The IMF report states that the surge in crypto trading has occurred against a “longer-term increase” for cross-border transactions using cryptocurrencies and calls for greater regulation and capital controls to allay the impact of a largely unregulated asset class on global financial stability.
Cryptocurrency businesses shirk from mandatory regulatory practices, such as AML/KYC, because it undercuts their decentralization ethos. This makes them easy conduits for criminals to launder money or for high net worth individuals (HNI) to use them to siphon money between jurisdictions.
“A more robust oversight of fintech firms and DeFi platforms is needed to take advantage of their benefits while mitigating their risks,” the report’s authors write.
How To Regulate DeFi
Proponents of decentralized finance (DeFi) might argue that it is almost impossible to regulate it, considering the system’s distributed nature that spans multiple countries and financial jurisdictions. The report’s authors say that regulation should focus on stablecoin issuers and centralized exchanges that are responsible for the bulk of cryptocurrency trading occurring in the world today.
The authors have also called for regulation and audits of code inside smart contracts that automate many financial transactions. “…measures could include public-private collaboration on code regulation through ex ante guidelines on operational and risk parameters (including operational and cyber resilience) or ex post code reviews and audits that can identify areas vulnerable to risk and help deliver policy objectives,” they write.
Finally, the report calls for development of industry codes and self-regulatory organizations that will help maintain order in a chaotic industry teeming with entrepreneurial innovators and hucksters alike.