IMF warns against crypto's impact on monetary policy and financial stability

The International Monetary Fund (IMF) warns that the widespread and rapid adoption of cryptocurrencies reduces the ability of central banks to effectively implement monetary policy and causes financial instability.

A blog post by IMF authored by three financial experts titled “Crypto boom poses new challenges to financial stability,” noted that many entities in the ecosystem “lack strong operational, governance, and risk practices.” These include exchanges, wallets, miners, and stablecoin issuers.

The authors, Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou, emphasized that consumer protection risks remain substantial as there is limited or inadequate disclosure and oversight.

They warned that when residents start using crypto assets instead of the local currency, the ability of central banks to effectively implement monetary policy is reduced and creates financial stability risks.

They added that threats to fiscal policy could intensify as crypto assets could facilitate tax evasion and capital outflows that impact the foreign exchange market.

Seigniorage, the profits accruing from the right to issue currency, may decline.

The authors also said that policymakers should enhance cross-border coordination to minimize the risks of regulatory arbitrage and ensure effective supervision and enforcement.

The total market value of all the crypto assets surpassed $2 trillion as of September 2021 — a 10-fold increase since early 2020.