Increasing Adoption Of Crypto Assets Pose Financial Stability Challenges: IMF

Increasing Adoption Of Crypto Assets Pose Financial Stability Challenges: IMF

Subject – Economy

Context – The rapid growth of the crypto ecosystem presents new opportunities; the IMF has said but also cautioned that the digital currency assets pose financial stability challenges.

Concept –

• The rapid growth of the crypto ecosystem presents new opportunities, the IMF has said but also cautioned that the digital currency assets pose financial stability challenges.
• Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds, operating independently of a central bank.
• Technological innovation is ushering in a new era that makes payments and other financial services cheaper, faster, more accessible, and allows them to flow across borders swiftly,” said in a chapter of its latest report Global Financial Stability Report.
• Crypto asset technologies have the potential as a tool for faster and cheaper cross-border payments. Bank deposits can be transformed to stable coins that allow instant access to a vast array of financial products from digital platforms and allow instant currency conversion.
• Decentralised finance could become a platform for more innovative, inclusive, and transparent financial services.
• Bitcoin could lead to instability because it is extremely volatile.
• It’s fine as an investment asset right. But as a monetary aggregate, it just doesn’t have the right properties.
• Transaction costs can be fairly expensive and compared to digital money, as it’s the case in India for example, where you have a real-time gross settlement payment system, it’s actually slow because it’s a distributed ledger, and to know that the transaction has gone through, it has to be verified on all of these different computers. So, it’s not that instantaneous, and it can be expensive to transact and it’s extremely volatile. It doesn’t have the properties that you want money to have.
• The IMF in its report said that challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto asset providers, investor protection risks for crypto-assets and DeFi, and inadequate reserves and disclosure for some stable coins.
• “Crypto-assets offer a new world of opportunities: Quick and easy payments. Innovative financial services. Inclusive access to previously “unbanked” parts of the world. All are made possible by the crypto ecosystem”. But along with the opportunities come challenges and risks.

International Monetary Fund

• IMF is an organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
• Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership. India Joined on December 27, 1945.
• The IMF’s primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.
• The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

Reports by IMF

Multilateral surveillance involves monitoring global and regional economic trends and analyzing spill overs from members’ policies onto the global economy. As part of its World Economic and Financial Surveys, the IMF publishes flagship reports on multilateral surveillance twice a year:

• World Economic Outlook (WEO), 
• Global Financial Stability Report (GFSR)
• Fiscal Monitor (FM).

The WEO provides detailed analysis of the state of the world economy, addressing issues of pressing interest such as the protracted global financial turmoil and ongoing economic recovery from the global financial crisis. The GFSR provides an up-to-date assessment of global financial markets and prospects and highlights imbalances and vulnerabilities that could pose risks to financial market stability. The FM updates medium-term fiscal projections and assesses developments in public finances. The IMF also publishes Regional Economic Outlook (REO) reports as part of its World Economic and Financial Surveys.