IMF Offers 9 Crypto Policy Recommendations: “Doing Nothing Is Unsustainable”

The Executive Board of the International Monetary Fund (IMF) has provided guidance to IMF member countries on key elements of an appropriate policy response to crypto assets.

The announcement follows an internal paper addressing questions raised by IMF member countries about the benefits and risks of crypto-assets and how to structure appropriate policy responses.

The paper operationalizes the principles outlined in the Bali Fintech Agenda (IMF and World Bank 2018) and includes macroeconomic considerations as implications for monetary and fiscal policy.

The IMF says the proposed principles are in line with its mandate to support economic and financial stability across membership and address and are fully aligned with the relevant standards of the Financial Stability Board and other standard-setting bodies.

“Do not give crypto-assets the status of official currency or legal tender”

The IMF has taken this step as efforts to put in place effective guidelines for cryptoassets have become a key political priority for the authorities, amid the failure of various exchanges and other players within the cryptoecosystem, as well as the collapse of certain cryptoassets.

“Doing nothing is unsustainable as cryptoassets can continue to develop despite the current slowdown,” said the IMF announcement, which set out a nine-element framework to help develop a comprehensive, consistent and coordinated policy response:

1. Safeguard monetary sovereignty and stability by strengthening monetary policy frameworks and not giving crypto assets the status of official currency or legal tender.

2. Protect against excessive volatility in capital flows and maintain the effectiveness of capital flow management measures.

3. Analyze and disclose tax risks and adopt unambiguous tax treatment of crypto assets.

4. Establish legal certainty for crypto assets and address legal risks.

5. Develop and enforce supervisory, conduct and oversight requirements for all crypto market participants.

6. Establish a common monitoring framework across different national agencies and authorities.

7. Establish international cooperative arrangements to improve oversight and enforcement of crypto-asset regulations.

8. Monitor the impact of cryptoassets on the stability of the international monetary system.

9. Strengthen global cooperation to develop digital infrastructures and alternative solutions for cross-border payments and finance.

The IMF argues that such a framework would enable policymakers to better mitigate the risks posed by cryptoassets, while harnessing the potential benefits of the technological innovation associated with it.

The official statement summarized the board discussion on crypto and its policy recommendations:

“Executive Directors welcomed the opportunity to discuss the policy paper on elements of effective cryptoasset policy. They noted the timeliness and importance of the paper, as well as its relevance to the IMF’s broad and diverse membership, and generally emphasized the need for a comprehensive framework. They believed that the growing use of cryptoassets in some countries, the extraterritorial nature of cryptoassets and their providers, as well as the increasing interconnection with the financial system, motivates the need for a comprehensive, consistent and coordinated response.

“Directors generally observed that while the supposed potential benefits from crypto-assets have yet to materialize, significant risks have emerged. These include macroeconomic risks, which include risks to the effectiveness of monetary policy, volatility in capital flows and fiscal risks. They also noted serious concerns about financial stability, financial integrity, legal risks, consumer protection and market integrity Against this backdrop, directors broadly welcomed the proposed framework and its elements.

“Board members agreed that cryptoassets have policy implications that lie at the core of the Fund’s mandate. In particular, the widespread use of cryptoassets could undermine the effectiveness of monetary policy, circumvent capital flow management measures and exacerbate fiscal risk. Widespread adoption could also have significant implications for the international monetary system on longer term. The board members therefore emphasized that robust macroeconomic policies, including credible institutions and monetary policy frameworks are the first priority, and that the fund’s advice in these areas will continue to be decisive. Board members generally agreed that crypto-assets should not be given the status of official currency or legal tender to ensure monetary sovereignty and stability Fiscal risks posed by crypto-assets, including contingent liabilities to the government, should be fully disclosed as part of countries’ fiscal risk disclosure, and the applicability of tax regimes more should be clarified.

“Directors broadly agreed on the need to develop and apply comprehensive regulations, including supervisory and conduct regulation for crypto-assets, and effective implementation of the FATF standards on AML/CFT. They noted that the Fund should work closely to support regulatory efforts under management and guidance of standard-setting bodies. In this context, board members emphasized the importance of fully aligning the framework with the initiatives and standards set by standard-setters. Board members agreed that strict bans are not the first best option, but that targeted restrictions may apply, depending on domestic policy goals and where governments face capacity constraints. However, a few board members believed that outright bans should not be ruled out. Board members noted that regulation should be mindful not to stifle innovation, and the public sector could leverage some of the underlying technologies of cryptoassets for their public policing happen goal.

“Directors emphasized the importance of prioritizing elements of the framework where countries face implementation challenges, including weak regulatory institutions. They emphasized that the pace and sequence of implementation should be adapted to the countries’ respective conditions. It will be important to underpin regulatory processing with clear and sound private and public law frameworks. Strong coordination between authorities, both at national and international level, is essential for consistent implementation and to avoid regulatory arbitrage. Board members also highlighted the importance of promoting the principle of “same activity, same risk, same regulation.”

“The directors agreed that the framework should be used to guide staff’s policy dialogue with the country’s authorities and capacity development activities, as well as participate in discussions with standard-setting organisations. They emphasized the need to focus on the fund’s comparative advantages and on macro-financial implications. They also saw a role for the Fund in serving as a bridge between the membership experience and the international standard and rule-making process, including dissemination of best practice. Board members emphasized the importance of tailored advice and close dialogue with the authorities, given the different stages of development of cryptoassets and different capacities among member countries. The fund’s capacity development support will be crucial.

“Directors emphasized the importance of addressing the significant data gaps and emphasized the Fund’s role in monitoring risks and impacts on the international monetary system. In this context, they welcomed the new G20 Data Gaps Initiative. Consistent recording of crypto-assets in macroeconomic statistics across economies, underpinned by a reliable data framework, will be important.

“Looking ahead, the board members emphasized that the fund can act as a thought leader in further analytical work on rapidly evolving developments in cryptoassets. They emphasized the importance of promoting continuous knowledge sharing and learning from practical implementation issues in the field. Fund work on cryptoassets is expected to remain within the agreed framework for budget increase.”