The International Monetary Fund has said that while the crypto ecosystem continues to grow, it poses serious challenges to a country’s financial stability. He added that this could be especially true for emerging markets and developing economies.

India has recently seen a massive surge in crypto users. The number of blockchain startups topped 300 in 2021, with the daily crypto transaction volume peaking between $ 300 million and $ 500 million. According to the Global Consumer Survey 2020, 99% of those surveyed responded that they were trading in cryptocurrencies. India ranks higher than China, the United States, Germany, and Japan in crypto adoption. Nigeria, Vietnam and the Philippines lead the survey mentioned.

“The challenges posed by the crypto ecosystem include operational and financial integrity risks for crypto asset providers, investor protection risks for crypto and Defi assets, and inadequate reserves and disclosure for some stablecoins.” , indicates the report.

The IMF, in its Global Financial Stability Report 2021, pointed out that for emerging markets and developing economies, adopting cryptocurrency can be appealing, but it also comes with a set potential macrofinancial risks, in particular with regard to the substitution of assets and currencies. The IMF has called this phenomenon “crypto”.

Cryptos Rise Amid Significant Episodes of Price Volatility

After recurring swings, the market value of crypto assets rose again to over $ 2 trillion at the time of the report’s release, the IMF said. This represents a 170 percent increase since the start of the year.

“Despite significant price appreciation, returns on unstable crypto assets are less impressive when adjusted for volatility. For example, Bitcoin’s risk-adjusted returns over the past year are similar to those larger tech stocks or the S&P 500, “the IMF noted.

According to the report, Bitcoin remains the dominant crypto asset. However, its market share fell sharply in 2021, from 70% to less than 45%. He said interest has shifted to new blockchains that use smart contracts that replace previous ones by improving scalability, interoperability and sustainability.

Stablecoin’s trading volumes topped all other crypto assets. This is mainly due to their ease of use for on-the-spot settlements and on-exchange derivative transactions. The relative price stability has shielded users from the volatility of other crypto assets. It further implies that users do not withdraw their funds from the crypto ecosystem.

The crypto-ecosystem is free of middlemen and the correspondence credit platforms match borrowers and lenders without any credit risk assessment. They operate directly on blockchains without any customer identification requirement. The IMF has said that the deregulated finance made possible by the crypto ecosystem has particularly contributed to its popularity and contribution.

Why can cryptos be vulnerable?

The IMF has pointed out that cryptos are particularly vulnerable and are associated with a range of operational, cyber and governance risks.

Operational risks can potentially lead to significant downtime when outages and interruptions prevent the use of services. This could potentially result in huge losses for the customer. Long periods of transaction activity and poorly designed systems and controls make it particularly vulnerable to such risks.

Cyber ​​risks arise because these systems are prone to cyber attacks.

Third, governance risks as these platforms lack transparency as to how cryptos are issued and distributed. This could again pave the way for huge losses.

In the absence of a surveillance mechanism, the ecosystem is vulnerable to consumer fraud and market integrity risk, the IMF said. He added that most crypto assets are highly volatile and speculative assets. The recent ‘meme token’ phenomenon is one example, with most speculative assets and prices inflated by social media trends.

“Monitoring the activity of crypto-asset service providers is complicated by limited, fragmented, and in some cases unreliable data. Public data sharing by crypto-asset providers is currently mostly voluntary and lacking. standardization, ”he said. Additionally, crypto-asset providers are often headquartered in jurisdictions with favorable regulatory, tax, and legal frameworks.

Macroeconomic challenges

There is no reliable method for estimating the stock or flow of crypto assets based on the country of residence, the IMF said. He added that a commonly used proxy is residence estimates based on internet visits to the websites of crypto asset providers.

Unenthusiastic macroeconomic policies and inefficient payment systems have been key factors in speeding up ‘crypto’. Additionally, cryptos have helped domestic residents convert some of the headwinds of traditional dollarization into tailwinds. This leads to lower central bank credibility and triggers asset substitution. This could hamper the effective implementation of monetary policy by central banks and pave the way for currency mismatches. It could also lead to tax evasion.

“Given the large proportion of unbanked people in some emerging markets and developing economies, remittances are often effected through cash-heavy methods, such as those from post offices and other operators. The payment rails of crypto assets can make some of these services faster and cheaper, notably through the integration of stablecoins, which allow a stable unit of account, ”the report said.

The path to follow

The IMF suggests: “Adopt de-dollarization policies, including strengthening the credibility of monetary policy, a sound fiscal position, effective legal and regulatory measures and the implementation of central bank digital currencies.”

He added that prioritizing the adoption of global standards and more in-depth regulations in areas of systematic importance would help ease the pressures.