IMF’s Crypto Risk Assessment, Policy Proposals

The International Monetary Fund (IMF) published a working paper proposing a vulnerability inventory and potential policy responses for the crypto sector.

The IMF released a working paper titled “Assessing Macrofinancial Risks from Crypto Assets” on September 29. Burcu Hacibedel and Hector Perez-Saiz proposed a crypto-risk assessment matrix (C-RAM) for countries to identify indicators and triggers of prospective sector risks.

The matrix also attempts to summarize potential regulatory responses to the identified risks. The matrix employs a three-step strategy.

Crypto ecosystem links to the traditional financial sector. Source: IMF

Using a decision tree, the first stage entails determining the crypto-macro criticality or the potential impact on the macroeconomy. The next stage is to examine comparable indicators to those used to monitor the traditional financial sector.

“The use of crypto assets in El Salvador could also be assessed as macrocritical as recent regulatory and legal changes entail the risk of substantial cryptoization in the country, undermining financial stability and affecting large remittances and other capital inflows.”

The last step encompasses the global macro-financial risks affecting countries’ systemic risk assessment. For instance, the authors utilized C-RAM to identify hazards in El Salvador, which legalized Bitcoin in September 2021.

El Salvador’s use of Bitcoin entails market, liquidity, and regulatory risks, according to the paper. The IMF has consistently discouraged El Salvador from adopting Bitcoin, according to the authors.

In January 2022, the IMF urged the Central American nation to remove Bitcoin’s status as legal tender. According to the International Monetary Fund, the use of Bitcoin as legal tender poses “large risks” in areas such as financial stability, financial integrity, and consumer protection.

As crypto develops rapidly, regulators are playing catch-up in implementing responses to potential risks in the emerging space.

At the behest of the Indian G20 presidency, the IMF and the Financial Stability Board collaborated on a policy recommendation paper on September 7.

The paper consolidated standards and recommendations for various hazards associated with cryptographic activities.