Hostile to crypto assets? The IMF's evolving attitude towards crypto asset regulation

In recent years, crypto assets and their underlying technology blockchain have attracted widespread attention around the world, which not only brings challenges to traditional financial markets, but also brings regulatory challenges to governments and international organizations. As an authoritative organization in the global financial field, the International Monetary Fund (IMF) has always paid attention to the development of financial technology and its impact on the global financial system. Its relationship with crypto assets is relatively complicated: on the one hand, as a product of the Bretton Woods system, the IMF can "influence" the economic policies and even economic systems of recipient countries through conditional economic assistance. Some developing countries sometimes feel "oppressed by the IMF's rulings and neoliberal dogma" and try to "escape the control of the IMF" by using cryptocurrencies instead of legal currencies; on the other hand, crypto assets will affect the economic stability of developing countries with weaker economic strength to a certain extent, so a sound regulatory system needs to be established. In this context, the IMF's regulatory attitude towards crypto assets is of special significance and has gradually become the focus of attention inside and outside the industry. This article will take this as a starting point to review the evolution of the IMF's crypto asset regulatory documents and explore the development of regulatory policies in the "post-winter era" of crypto assets.

1. Initial attention and assessment

In 2013, the IMF published its first report on virtual currencies, which explored in depth the concept, characteristics, potential risks and regulatory issues of virtual currencies. The report defines virtual currencies as: "a digital asset that uses encryption technology for security protection and uses peer-to-peer networks for transactions." It further points out that virtual currencies do not rely on any central agency for issuance and supervision, but are issued and verified through the consensus mechanism of computer networks. This decentralized feature makes virtual currencies censorship-resistant, low-cost and efficient. The report analyzes the impact of virtual currencies on financial stability, monetary policy, financial innovation and other aspects, and also discusses the regulatory challenges related to virtual currencies. Due to the popularity and rapid development of virtual currencies, regulators need to take prompt measures to regulate this market. However, the cross-border and decentralized nature of virtual currencies makes regulation difficult. Countries should formulate corresponding regulatory policies based on the characteristics and risks of virtual currencies. This includes regulating the issuance, trading and storage of virtual currencies to prevent them from being used for illegal activities such as money laundering and terrorist financing. At the same time, the IMF also encourages countries to take into account the innovativeness and potential positive impact of virtual currencies when formulating regulatory policies.

The IMF then set up a chapter for the first time in its Financial Stability Report to discuss the impact of crypto assets on financial stability. The report points out that although the crypto asset market is relatively small, they may have an impact on financial stability, especially when risks arise in financial markets. Policymakers should pay attention to the risks in the crypto asset market and take appropriate policy and regulatory measures to ensure the stable development of the market.

With the development of crypto assets, the IMF further released a new report in 2015, further expanding and deepening the concept of virtual currency. The IMF pointed out that digital currency is an "asset in digital form that can be used as a means of payment and a means of storing value." In addition, the IMF divides digital currencies into three categories: Central Bank Digital Currencies (CBDCs), Stablecoins, and Other Crypto-Assets (OCA). The report analyzes the impact of these three types of digital currencies in detail. Since cryptocurrencies are not issued by governments or central banks, they are not subject to traditional monetary policies. The report points out that if cryptocurrencies are widely adopted, they may affect the measurement of money supply and the effectiveness of monetary policy implementation. In addition, cryptocurrencies may have an impact on financial stability because they may be used for illegal activities such as money laundering and terrorist financing.

2. Concern and confidence in innovation of crypto assets

During this period, the IMF has published a number of reports and articles focusing on innovation in the field of crypto assets. Christine Lagarde, Managing Director of the IMF, has shown great confidence in the development of crypto assets: "I believe that the adoption of digital currencies will be in the interests of financial institutions," and "I would be very surprised if many existing financial institutions do not adopt these tools in five years."

In 2016, the IMF published a paper on virtual currencies, which provided a detailed analysis of virtual currencies, distinguished virtual currencies from other digital currencies, and pointed out for the first time that virtual currencies do not conform to the legal concept of currency. Because the legal concept of currency is related to the sovereignty of establishing a legal framework that regulates the issuance of currency and the monetary system. The paper also pointed out from a functional perspective that virtual currencies cannot perform the functions associated with currency due to price fluctuations, limited acceptance due to lack of legal tender status, and lack of evidence that they are an independent unit of account. In addition, the paper distinguishes between distributed ledger systems and centralized payment systems, and points out that in the long run, distributed ledgers have the ability to revolutionize the financial sector by reducing costs and deepening financial inclusion.

In 2017, the IMF released a report on the development of the fintech industry, focusing in particular on the rapidly growing cross-border payment industry, and made recommendations on how to effectively regulate distributed ledger technology and digital currencies using this technology. The report emphasized: "New technologies may require jurisdictions to modify the rules of ownership and contractual rights and obligations." It also recommended the adoption of stricter customer information guidelines and regulatory standards to prevent money laundering, tax evasion and terrorist financing.

In 2018, the IMF published an article titled "Addressing the Dark Side of the Crypto World", which pointed out that we can first focus on policies to ensure financial integrity and protect consumers in the crypto world, just as we did with the traditional financial sector. For the first time, the IMF clearly pointed out that since crypto assets have no borders and no country can deal with challenges alone, the regulatory framework must also be global. It would be unwise to abandon crypto assets, and we must welcome their potential, work together and use technology to benefit the public interest, but also recognize their risks and ensure that they never become a haven for illegal activities or a source of financial fragility. The IMF will play its part in this effort, and with its near-universal membership and expertise (including expertise in combating money laundering and terrorist financing), it will become a forum to help find answers in the evolving field of crypto assets.

In 2019, the IMF published an article titled "The Rise of Digital Currency", which analyzed how crypto asset companies compete with large banks and credit card companies. The article affirms that digital currencies may flourish under the advantages of convenience, universality, complementarity, low transaction costs, trust and network effects. At the same time, it emphasizes the regulation that may emerge after widespread adoption, as well as the risks associated with digital currencies: the possibility of new monopolies, threats to weak currencies, concerns about consumer protection and financial stability, and the risk of facilitating illegal activities. Crypto assets will be more attractive, especially in countries with high inflation rates and weak institutions. The article also points out that when assets are supported by decentralized technology and stakeholders, it is difficult for virtual asset service providers (VASPs) such as cryptocurrency exchanges to comply with anti-money laundering (AML) and counter-terrorism financing (CFT) regulations distributed in various jurisdictions. The article also provides some solutions: In order to prevent the formation of monopolies and protect monetary policy, central banks can play a role in providing central reserves for stablecoin issuers, or consider issuing their own digital currencies. At the same time, the central bank can grant licenses under regulatory conditions and require service providers to be responsible for customer screening, transaction monitoring and reporting of suspicious activities in accordance with Know Your Customer (KYC), Anti-Money Laundering and Anti-Terrorist Financing regulations. It can also set industry standards for the security of crypto wallets and customer data.

III. Caution after the “cold winter”: the concretization and globalization of supervision

As the crypto asset industry suffers from a "cold winter", the IMF's attitude has become more cautious. In 2021, the IMF published an article titled "The Rise of Public and Private Digital Currencies: Strategies for Continuing to Fulfill the IMF's Mission", which affirmed the advantages of digital currencies such as speed, simplicity, efficiency and inclusiveness. Considering the broad and profound impact it brings, in order to increase returns and manage risks, policymakers need to speed up their pace: First, digital currencies must remain trustworthy. They must protect consumers, ensure security, be based on a sound legal framework, and support financial integrity; second, domestic economic and financial stability must be protected through well-designed public-private partnerships, a smooth transition of banking roles, and fair competition. The design of digital currencies should support climate sustainability and effective fiscal policies; third, the international monetary system should remain stable and efficient, and digital currencies must be designed, regulated, and provided so that countries can maintain control over monetary policy, financial conditions, capital account opening, and foreign exchange systems. Payment systems must be increasingly integrated and must apply to all countries, not fragmented, and the digital divide needs to be avoided; finally, reserve currency allocation and support must be taken into account in policy making.

The IMF stressed that low-income countries and emerging market developing countries with underdeveloped digital capabilities will need timely advice and capacity development assistance in key macro areas relevant to these countries. The IMF will focus more on the development of analytical frameworks and multilateral surveillance and capacity development at this stage, and pilot or limit the coverage of this issue in bilateral surveillance.

In the same year, the IMF stated in the Global Financial Stability Report that the adoption of crypto assets and stablecoins by emerging markets and developing economies could pose challenges to the macroeconomic and financial stability of these countries. Although the risks are "currently under control", regulators still need to monitor cryptocurrencies and control them. The IMF believes that areas at risk of hacking are the "lack of transparency in the issuance and distribution of tokens", as well as operational risks, including disruptions during periods of extreme volatility.

In a series of reports, the IMF acknowledged that crypto assets are no longer on the margins of the financial system, noting that “given the relatively high volatility and valuations of cryptocurrencies, their growing inter-movement could soon pose risks to financial stability.” Experts further called for a coordinated global regulatory framework “to guide national regulation and supervision and to mitigate financial stability risks posed by the crypto ecosystem.”

In January 2022, the IMF asked El Salvador to abandon its policy of using Bitcoin as legal tender, and in May, it pressured Argentina to restrict trading in crypto assets as a condition for extending its loan. It then warned the Marshall Islands that recognizing digital currencies as legal tender could "increase risks to macroeconomic and financial stability and financial integrity." This series of cautious and pessimistic actions has made people realize that this multilateral institution that serves about 190 countries may have a more nuanced view of cryptocurrencies. The president and co-founder of ProChain Capital claimed that "I do believe that the IMF is a stubborn enemy of cryptocurrencies." Given that Bitcoin and other cryptocurrencies are "issued" by non-state entities and are borderless, "cryptocurrencies have the potential to be ubiquitous, which can greatly reduce the need for the IMF, a United Nations financial institution."

But in its September report, Regulating Cryptocurrencies, the IMF seemed to have no problem with the existence or even the proliferation of non-governmental digital currencies. In fact, it called for a “global regulatory framework” for cryptocurrencies in order to bring order to the market “and provide a safe space for useful innovation to continue.” The IMF’s opinions on the Marshall Islands and El Salvador concerned the national governments’ adoption of cryptocurrencies as legal tender when their units of account were already established. And these negative opinions mainly focused on the macroeconomic impact of tying the fiscal wagon to cryptocurrencies. Institutionally, “the IMF is indeed skeptical of cryptocurrencies and has come down hard on El Salvador,” said Josh Lipsky, senior director of the Atlantic Council’s Center for Geoeconomics, but this is because the organization is concerned about the financial fragility of the country’s economy: if El Salvador defaults on its international debt repayment obligations, the IMF “will have to bail them out.”

Given that, broadly speaking, the mission of non-governmental organizations like the IMF and the World Bank is to support global financial stability and stimulate economic growth in developing countries, there may be a natural tension with decentralized currencies. Because decentralized currencies are often unstable, uncontrollable financial instruments with no exact address or even identifiable principal. As the scholars pointed out, the IMF is often asked to deal with economies "plagued by corruption, incompetent leadership and phantom currencies", so it really has "no incentive to add another 'issuerless' currency." However, the IMF cannot ignore the reality that the future will be full of cryptocurrencies.

In 2023, the IMF released a series of research reports, and TaxDAO has compiled the main ones (click the link in the article to jump). In February, the IMF released the "Elements of Effective Policy for Crypto Assets", reaffirming the principle of "same activities, same risks, same supervision" and developing a framework of nine policy principles to address macro-financial, legal and regulatory, and international coordination issues. In the Global Financial Stability Report released in April, after the collapse of cryptocurrency companies such as FTX and the subsequent collapse of cryptocurrency-friendly banks such as Silicon Valley, the IMF once again called for "comprehensive, consistent and adequate supervision" and stated that it would impose "strict prudential requirements" on the supervision of entities in the crypto asset ecosystem. In July, the IMF released a working paper on cryptocurrency taxation, pointing out that the current tax system lacks the coherence, clarity and effectiveness that can adapt to crypto assets because they were not built with crypto assets in mind. In addition, they need to do this on the basis of limited information in the context of continued rapid and complex innovation, while balancing the core goals of ensuring tax efficiency, fairness and revenue with the risk of stifling innovation. In September, the IMF and FSB released a joint report on crypto assets, which pointed out the risks that cryptocurrencies may pose to macroeconomic and financial stability, and proposed a roadmap for policy recommendations.

As the crypto asset industry gradually recovers, countries have successively established regulatory policies for crypto assets. The IMF, with its universal membership and professional organization, plays an important role in guiding countries to establish regulatory policies. However, facing the gap in economic development levels, regulatory attitudes and capabilities among countries around the world, it will be a major test for the IMF to find a balance between a cautious attitude and the ambitious goal of seeking to play a leading role in regulation.