Source: IMF Author: IMF Compilation: Hong Caixuan
Recently, the Executive Board of the International Monetary Fund (IMF) discussed a board paper on effective policies for crypto assets. This article is a report by the IMF on the effectiveness of crypto asset policies at the meeting, titled “Elements of Effective Policies for Crypto Assets”. The report summarizes nine core elements of an effective policy framework, through which policymakers can better mitigate the risks associated with crypto assets and leverage the potential benefits of related technological innovations to help member countries establish a comprehensive, consistent, and coordinated framework for crypto assets. The Financial Technology Research Institute of Renmin University of China (WeChat ID: ruc_fintech) has compiled the core part of the research.
This article mainly discusses the effectiveness of the IMF’s policies on crypto assets. It proposes nine policy measures, including macro-financial considerations, domestic regulation, and global coordination, to help member countries formulate comprehensive, consistent, and coordinated policies to address the risks and challenges of crypto assets. The article also mentions that the widespread adoption of crypto assets may increase public fiscal risks, and granting crypto assets official currency or legal tender status may have profound implications for monetary stability and fiscal risks. The article also emphasizes the importance of global coordination and the role of the public sector in leveraging new technologies to facilitate cross-border payments.
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Crypto assets are not unfamiliar to people, and their ecosystem is evolving, requiring appropriate strategies for management. Although crypto assets emerged after the global financial crisis, it was not until recently that they were considered to pose significant risks. The volatility of their market value has increased, their correlation with other financial assets has become stronger, and their adoption in many emerging markets has changed people’s perception of the risks of crypto assets, as well as the need for appropriate policies to address these risks (Figure 1). In the recent decline in crypto valuations, the collapse of some crypto assets and the failures of exchanges and other participants in the crypto ecosystem have added impetus to this push. The main objective of this article is to provide guidance to members of the International Monetary Fund on key elements of an appropriate policy response to crypto assets. In addition, this article also aims to establish a comprehensive, consistent, and coordinated policy framework to address the risks associated with crypto assets.
Figure 1. Market Capitalization of Crypto Assets
Definition and Classification of the Crypto Ecosystem
Crypto assets are a broad term that encompasses many different products, representing privately issued digital representations of value that are encrypted and deployed using distributed ledger technology.
Under this broad definition, crypto assets can be categorized into three categories: uncollateralized tokens, stablecoins, and other assets. This article focuses on uncollateralized tokens (such as Bitcoin) and stablecoins (such as USDC), as they have a much larger scale and related risks. Public digital currencies such as central bank digital currencies are not within the scope of this article.
1. Unsecured Tokens are tokens that do not have any collateral assets. They are usually issued in a decentralized manner, transferable, and do not provide direct credit rights to the issuer. Without any backing assets, the price of unsecured tokens fluctuates, making them less suitable for fulfilling the main functions of currency: value storage, medium of exchange, and unit of account. People mainly hold these tokens in the hope of price appreciation.
2. Stablecoins are crypto assets that are issued in a centralized or decentralized manner. They aim to maintain a stable price through reserve assets or algorithms that respond to supply and demand. Stablecoins are usually priced in a currency unit (e.g. USD) and can be redeemed for cash at face value. They hold highly secure and liquid assets as reserves and provide the issuer with a direct legal claim, potentially capable of redeeming the tokens.
3. Other Assets include utility tokens and security tokens. Utility tokens are usually issued in a centralized manner and provide token holders with access to existing or future products or services. These tokens are typically limited to a single network (i.e. the issuer) or a closed network linked to the issuer, with limited transferability. Use cases include loyalty programs and pre-sale discounts. Security tokens are crypto assets that are typically issued in a centralized manner within a specific jurisdiction, transferable, and compliant with securities definitions. Use cases for security tokens include tokenized stocks, fractionalized non-fungible tokens, and initial coin offerings.
Benefits and Risks of Crypto Assets
Crypto assets have both benefits and certain risks. In terms of their positive impact, crypto assets can improve payment efficiency (faster speed and lower costs), innovation, resilience, transparency, and financial inclusion. However, these benefits may not be apparent at present, although they may still be realized, including through new designs of crypto assets. Even if crypto assets themselves have no intrinsic value, the technological innovations behind them and the emerging possibilities can be valuable to society, such as smart contracts. At the same time, crypto assets also come with significant risks, including macroeconomic risks, legal risks, and risks to financial integrity and stability. Some risks are related to the technologies that support crypto assets (e.g. distributed ledger technology), while others stem from the lack of policies or their enforcement. The significance of specific risks also depends on the circumstances of individual countries, and certain risks may not be relevant in all jurisdictions.
Policies and Regulatory Measures for Crypto Assets
In order to address the risks associated with crypto assets and harness the benefits of supporting innovative technologies, this paper proposes a policy framework consisting of nine elements to address risks and exploit the potential benefits of crypto assets. The first three elements involve macro-financial risks, while elements four to six address legal certainty risks, the safety and soundness of the financial system, financial integrity, consumer and investor protection, as well as market integrity and competition. Elements seven to nine discuss the importance of enhancing global coordination and cooperation, as unsecured tokens and stablecoins have cross-border characteristics. They also envision the use of technological innovation for public policy purposes, such as strengthening cross-border payments. It should be noted that the circumstances and capacity constraints of individual countries may affect the sequencing of the implementation of the elements in this framework.
The nine key elements are as follows:
Element 1. Maintain monetary sovereignty and stability by strengthening the monetary policy framework, without granting official currency or legal tender status to cryptocurrency assets.
Element 2. Guard against excessive fluctuations in capital flows and maintain the effectiveness of capital flow management measures.
Element 3. Analyze and disclose fiscal risks and adopt clear tax treatment for cryptocurrency assets.
Element 4. Establish legal certainty for cryptocurrency assets and address legal risks.
Element 5. Develop and enforce prudent, behavioral, and supervisory requirements for all participants in the cryptocurrency market.
Element 6. Establish a joint monitoring framework among different domestic institutions and authorities.
Element 7. Establish international cooperation arrangements to enhance supervision and enforcement of cryptocurrency regulations.
Element 8. Monitor the impact of cryptocurrency assets on the stability of the international monetary system.
Element 9. Strengthen global cooperation for cross-border payments and the development of digital infrastructure and alternative solutions for financial inclusion. These elements can help provide a comprehensive, consistent, and coordinated framework for cryptocurrency assets.
Figure 2: Mapping risks to response measures in three dimensions: the nine elements of an effective cryptocurrency policy framework
Conclusion and Recommendations
In summary, this article presents nine elements for an effective policy framework for cryptocurrency assets from three dimensions, providing a comprehensive, consistent, and coordinated framework for cryptocurrency assets. This framework will serve as the basis for efforts by staff to provide policy advice and capacity development to national authorities and participate in discussions of standard-setting bodies.
The first dimension of this framework highlights the importance of macro-financial considerations, including monetary policy, capital flow management, and fiscal policies. If widely adopted, cryptocurrency assets could potentially pose a currency substitution risk. The first line of defense is to ensure sound and effective monetary and fiscal policies and not declare privately issued cryptocurrency assets as national currencies.
The second dimension focuses on establishing domestic regulatory, supervisory, and oversight requirements and effective implementation of existing standards (e.g., Financial Action Task Force standards on anti-money laundering/countering the financing of terrorism). Its starting point is to establish legal certainty in both private and public law. Once legal certainty is established, it is generally best to implement comprehensive and consistent regulations. In some cases, targeted restrictions may also be necessary to address specific risks or challenges that cannot be effectively addressed through more general regulations. To complement the development of comprehensive regulations, the document provides a set of recommendations on prudent, behavioral, and supervisory requirements. The development of consistent domestic measures is crucial to avoid duplication and prevent arbitrage.
The third dimension involves the criticality of global coordination, recognizing the cross-border nature of encrypted assets, but also recognizing the potential of technological innovation for public policy purposes. Global coordination, monitoring the impact on the international monetary system, and developing alternative methods for cross-border payments are emphasized as priorities. The public sector should play a strong catalytic role in leveraging emerging technologies to promote improvements in cross-border payments.
Finally, this article acknowledges the heterogeneity of different jurisdictions, including different initial conditions and constraints. It is recommended to adopt a “constrained optimal solution” and pragmatic regulatory approach. Country-specific circumstances and capacity constraints may affect the speed and sequence of implementation. In addition, regulation of encrypted assets and broader policies will not address any potential design flaws, such as the lack of a trusted nominal anchor, payment finality, or scalability.
The following is a screenshot of part of the article.