Against Crypto Assets? The IMF's Evolving Stance on Crypto Asset Regulation

Author: TaxDAO

In recent years, crypto assets and their underlying technology, blockchain, have garnered widespread attention globally, posing challenges to traditional financial markets and presenting regulatory dilemmas for governments and international organizations. The International Monetary Fund (IMF), as an authoritative organization in the global financial sector, has been closely monitoring the development of financial technology and its impact on the global financial system. Its relationship with crypto assets is complex: on 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 judgments and neoliberal dogmas" and attempt to "escape the IMF's control" by using cryptocurrencies instead of fiat currencies; on the other hand, crypto assets can affect the economic stability of weaker developing countries to some extent, necessitating the establishment of a comprehensive regulatory framework. Against this backdrop, the IMF's regulatory stance on crypto assets is of particular significance and has gradually become a focal point of attention both within and outside the industry. This article will use this as a starting point to review the evolution of the IMF's regulatory documents on crypto assets and explore the development of regulatory policies in the "post-winter" era of crypto assets.

1. Initial Attention and Assessment

In 2013, the IMF released its first report on virtual currencies, delving into the concepts, characteristics, potential risks, and regulatory issues surrounding virtual currencies. The report defines virtual currency as: "a digital asset that uses cryptographic techniques for security and is traded using a peer-to-peer network." It further points out that virtual currencies are not issued or regulated by any central authority but are issued and verified through the consensus mechanism of computer networks. This decentralized characteristic gives virtual currencies features such as censorship resistance, low cost, and high efficiency. The report analyzes the impact of virtual currencies on financial stability, monetary policy, financial innovation, and discusses the regulatory challenges associated with virtual currencies. Due to the popularity and rapid development of virtual currencies, regulatory agencies need to take swift measures to oversee this market. However, the cross-border and decentralized nature of virtual currencies complicates regulation. 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 their use in illegal activities such as money laundering and terrorist financing. At the same time, the IMF encourages countries to consider the innovative nature and potential positive impacts of virtual currencies when formulating regulatory policies. Subsequently, the IMF established a dedicated chapter in its "Global Financial Stability Report" to discuss the impact of crypto assets on financial stability. The report notes that although the market size of crypto assets is relatively small, they may impact financial stability, especially during times of risk in financial markets. Policymakers should pay attention to the risks of the crypto asset market and take appropriate policy and regulatory measures to ensure stable market development. With the development of crypto assets, the IMF further released a new report in 2015, expanding and deepening the concept of virtual currencies. The IMF states that digital currency is "an asset that exists in digital form and can serve as a means of payment and a store of value." Furthermore, the IMF categorizes digital currencies into three types: Central Bank Digital Currencies (CBDCs), stablecoins, and Other Crypto-Assets (OCA). The report provides a detailed analysis of the impacts of these three types of digital currencies. Since cryptocurrencies are not issued by governments or central banks, they are not bound by traditional monetary policy. The report indicates that if cryptocurrencies are widely adopted, they may affect the measurement of money supply and the effectiveness of monetary policy implementation. Additionally, cryptocurrencies may impact financial stability as they can be used for illegal activities such as money laundering and terrorist financing.

2. Focus and Confidence in Crypto Asset Innovation

During this stage, the IMF released multiple reports and articles focusing on innovations in the crypto asset field. IMF President Christine Lagarde expressed great confidence in the development of crypto assets: "I believe that adopting digital currencies will align with 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, providing a detailed analysis that distinguished virtual currencies from other digital currencies and pointed out for the first time that virtual currencies do not meet the legal concept of money. This is because the legal concept of money is related to the sovereignty that establishes the legal framework governing the issuance of money and regulating the monetary system. The paper also pointed out from a functional perspective that due to price volatility, limited acceptance due to lack of legal tender status, and lack of evidence that they serve as an independent unit of account, virtual currencies cannot fulfill the functions associated with money. Additionally, the paper distinguishes between distributed ledger systems and centralized payment systems, noting that in the long run, distributed ledgers have the potential to fundamentally transform the financial sector by reducing costs and deepening financial inclusion. In 2017, the IMF released a report on the development of the fintech industry, particularly focusing on the rapidly growing cross-border payment sector, and proposed recommendations for effectively regulating distributed ledger technology and the digital currencies that utilize it. The report emphasized that "new technologies may require jurisdictions to modify the rules governing ownership and contractual rights and obligations." It also suggested adopting stricter know-your-customer (KYC) 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, similar to what has been done for the traditional financial sector, the initial focus should be on ensuring financial integrity in the crypto world and protecting consumers. The IMF explicitly stated for the first time that since crypto assets have no borders, no single country can tackle the challenges alone, thus the regulatory framework must be global. Abandoning crypto assets is unwise; their potential must be welcomed, and efforts should be made to harness technology for the public good while also recognizing their risks to ensure they never become a haven for illegal activities or a source of financial fragility. The IMF will play its role in this effort, leveraging its near-universal membership and expertise (including in combating money laundering and terrorist financing) to serve as a forum for helping find answers in the evolving crypto asset landscape. In 2019, the IMF published an article titled "The Rise of Digital Currencies," analyzing how crypto asset companies compete with large banks and credit card companies. The article affirmed that digital currencies could thrive under advantages such as convenience, universality, complementarity, low transaction costs, trust, and network effects. It also emphasized the potential regulatory challenges that may arise after widespread adoption, as well as the risks associated with digital currencies: the possibility of new monopolies, threats to weaker currencies, concerns about consumer protection and financial stability, and the risk of facilitating illegal activities. Especially in countries with high inflation rates and weak institutions, crypto assets may be more attractive. The article also pointed out that when assets are supported by decentralized technologies and stakeholders, virtual asset service providers (VASPs) such as cryptocurrency exchanges find it difficult to comply with anti-money laundering (AML) and counter-terrorism financing (CFT) regulations spread across various jurisdictions. The article also provided some solutions: to prevent monopolies and protect monetary policy, central banks could play a role in providing central reserves to stablecoin issuers and consider issuing their own digital currencies. At the same time, central banks could grant licenses under regulatory conditions and hold service providers accountable for customer screening, transaction monitoring, and reporting suspicious activities according to KYC, AML, and CFT regulatory requirements, as well as establish industry standards for the security of crypto wallets and customer data.

3. Caution After the "Winter": Specification and Globalization of Regulation

As the crypto asset industry faced a "winter," the IMF's attitude became more cautious. In 2021, the IMF published an article titled "The Rise of Public and Private Digital Currencies: A Strategy for Continuing to Fulfill the IMF's Mission," which affirmed the advantages of digital currencies in terms of speed, convenience, efficiency, and inclusiveness. Considering the broad and profound impacts they bring, policymakers need to accelerate their pace to enhance benefits and manage risks: first, digital currencies must remain trustworthy; they must protect consumers, ensure security, be built on a sound legal framework, and support financial integrity; second, domestic economic and financial stability must be protected through carefully designed public-private partnerships, smooth transitions in the role of banks, and fair competition; the design of digital currencies should support climate sustainability and effective fiscal policy; third, the international monetary system must remain stable and efficient, and digital currencies must be designed, regulated, and provided in a way that allows countries to maintain control over monetary policy, financial conditions, capital account openness, and foreign exchange systems; payment systems must become increasingly integrated and applicable to all countries, avoiding fragmentation and the digital divide; finally, the allocation and support of reserve currencies must be considered in policymaking. The IMF emphasized that low-income countries and emerging market developing countries with underdeveloped digital capabilities will need timely advice and capacity development assistance in macro-critical areas related to these countries. At this stage, the IMF will focus more on developing analytical frameworks and multilateral surveillance and capacity development, while piloting or limiting the scope of bilateral surveillance on this issue. In the same year, the IMF stated in its 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 contained," regulators still need to monitor and control cryptocurrencies. The IMF identified areas at risk of hacking as those where token "issuance and distribution lack transparency," as well as operational risks, including disruptions during extreme volatility. In a series of reports, the IMF acknowledged that crypto assets are no longer on the fringes of the financial system and noted that "given the relatively high volatility and valuation of cryptocurrencies, their increasingly strong interconnectedness could soon pose risks to financial stability." Experts further called for the establishment of a coordinated global regulatory framework "to guide national regulation and oversight and mitigate the financial stability risks posed by the crypto ecosystem." In January 2022, the IMF urged El Salvador to abandon its policy of adopting Bitcoin as legal tender, and in May, it pressured Argentina to limit crypto asset trading as a condition for extending loans. It subsequently 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 made it clear that this multilateral institution serving approximately 190 countries might have a more nuanced view of cryptocurrencies. The President and co-founder of ProChain Capital claimed, "I do believe the IMF is a staunch opponent 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 could significantly reduce the demand for the IMF as a UN financial institution." However, in the report "Regulating Cryptocurrencies" released in September, the IMF seemed to have no objections to the existence or even proliferation of non-government digital currencies. In fact, it called for the establishment of a "global regulatory framework" for cryptocurrencies to bring order to the market and "provide a safe space for continued useful innovation." The IMF's opinions on the Marshall Islands and El Salvador pertain to national governments adopting cryptocurrencies as legal tender despite having already established their own unit of account. Moreover, these negative opinions mainly focus on the macroeconomic impacts caused by tying fiscal policies to cryptocurrencies. Institutionally, "the IMF does hold a skeptical view of cryptocurrencies and has been quite harsh on El Salvador," said Josh Lipsky, Senior Director of the Atlantic Council's GeoEconomics Center, but this is because the organization is concerned about the financial fragility of the country's economy: if El Salvador fails to meet its international debt repayment obligations, the IMF "will have to bail them out." Considering that broadly speaking, the missions of non-governmental organizations like the IMF and the World Bank are to support global financial stability and stimulate economic growth in developing countries, there may be a natural tension regarding decentralized currencies. This is because decentralized currencies are often unstable, difficult to control financial instruments, lacking a specific address or identifiable responsible parties. As scholars have pointed out, the IMF is often called upon to deal with economies "plagued by corrupt, incompetent leadership and illusory currencies," thus it really "has no incentive to add another 'issuer-less' currency." However, the IMF cannot ignore the reality that the future will be filled with cryptocurrencies. In 2023, the IMF released a series of research reports, and TaxDAO has compiled the main research reports among them (click the links in the text to jump). In February, the IMF published “Key Policy Elements for Effective Crypto Asset Policies”, reiterating the principle of "same activity, same risk, same regulation," and establishing a framework containing nine policy principles aimed at addressing macro-financial, legal and regulatory, and international coordination issues. In the Global Financial Stability Report released in April, following the collapse of crypto companies like FTX and the subsequent failures of crypto-friendly banks like Silicon Valley Bank, the IMF again called for "comprehensive, consistent, and adequate regulation," stating that it would impose "strict prudential requirements" on the regulation of entities within the crypto asset ecosystem. In July, the IMF released a working paper on cryptocurrency taxation, pointing out that the current tax system lacks coherence, clarity, and effectiveness to adapt to crypto assets, as it was not designed with crypto assets in mind. Moreover, it needs to achieve this in the context of ongoing rapid and complex innovations, based on limited information, while balancing the core goals of ensuring tax efficiency, fairness, and revenue against the risk of stifling innovation. In September, the IMF and FSB released a joint report on crypto assets, which identified 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 and countries successively establish regulatory policies for crypto assets, the IMF, with its universal membership and organizational expertise, plays an important role in guiding countries in establishing regulatory policies. However, in the face of the gaps in economic development levels, regulatory attitudes, and capabilities among countries, seeking a balance between a cautious approach and the ambitious goal of seeking to play a leading role in regulation will be a significant test for the IMF.