Proof of Stake Risk Concentrates Power to Crypto Exchanges, Wallets: IMF

The International Monetary Fund (IMF) highlighted some potential problems around one proof of effort (PoS) approach to blockchain infrastructure as part of a recent articlestorage proposal for a regulatory framework that can limit global digital asset risks.

PoS is another option proof of work (PoW) consensus mechanism, which Bitcoin user, and the older pre-merge version of Ethereum used.

Instead of dedicating hardware resources to secure the network, such as in the case of PoW, PoS “validators” stake the network’s native cryptocurrency to validate transactions on the blockchain.

The article touched on how PoS “could create an excessive concentration of decision-making authority on crypto exchanges and wallet service providers, which could increase market integrity risks” despite potential energy savings. It also highlighted how PoW mining requires significant energy, which could work against the “global goal of transitioning to a low-carbon economy.”

Regarding tech regulation in general, the paper said regulators should take a “technology-neutral approach” but should also “consider the regulatory implications of different forms of technology” as “certain types of consensus mechanisms underpinning blockchains may inherently generate frictions with broader policy goals and mandates” stating that a “technology-neutral approach may not be sustainable going forward.”

IMF, FSB and crypto

The report also made a number of other recommendations, including urging the Financial Stability Board (FSB) to step up, saying it is “well-positioned to take the lead in coordinating and establishing global standards to support national regulation of crypto-assets.”

The FSB was established in 2009 in the immediate aftermath of the 2008 credit crisis.

Working from Basil, Switzerland, the organization monitors and makes recommendations on the global financial system, and it has been described as “a fourth pillar” of worldwide economic governance along with the International Monetary Fund, the World Bank and the World Trade Organization.

The report went on to say that “the risks to financial stability of cryptoassets are not yet globally systemic, but the growing systemic implications can already be seen in some countries,” and it identified a significant increase in the correlation between cryptoassets and financials. assets in periods of market stress, taken from own research.

Key steps outlined in the paper include ensuring that “centralized key entities that perform core functions are licensed and authorized” and that authorities may want to consider the risks around “volatility, market awareness, product knowledge and understanding, and how cryptoassets are used.”

Throughout the article, the IMF emphasized the importance of international cooperation, saying that “the cross-sectoral and cross-border dimensions of cryptoassets make national and international coordination and cooperation key,” more so than “in the case of many traditional financial activities.”

Without this interconnected approach to regulation, there could potentially be a risk of “a race to the bottom by regulators and policymakers” and also that there are limited opportunities to deal with “regulatory arbitrage by financial entities”, according to the IMF’s report.

However, the IMF was clear that “regulation should not be seen as stifling innovation, but rather as building confidence.”