The IMF Stablecoins Global Financial System

In report of global financial stability in 2021, the International Monetary Fund (IMF) said that cryptocurrencies are not yet a real threat to the international system, but “should closely monitor global risks and regulatory frameworks, which are lacking in performance in most countries”.

To remedy the deficiency, the organization is calling for a “global standard for cryptocurrencies”. In this way they believe that they can counteract the “risk of contagion” to other markets.

The IMF is an influential intergovernmental organization with 190 member countries that promotes world trade, poverty reduction and stable monetary policy. The IMF uses fees from its members to make loans to other members who agree to their terms. According to April 2021 figures, the institute has around $ 1 trillion in these loans, which is nearly 50% of its total crypto market cap.

Mentions of cryptocurrencies are highlighted in the Covid-19, Crypto and Climate: Navigating Challenging Transits section of this year’s report, which outlines the IMF’s position in pooling digital assets in the face of pandemics and potential disasters. The report also evaluates “both opportunities and challenges” arising from the growth of digital assets.

“The rapid growth of the ecosystem has also paved the way for new companies, but some of them have poor operations, network risk management and governance,” the report said, alluding to the stock market incidents. Transactions have failed, centralized platforms are hacked, and some token issuance and distribution events have low visibility.

While all of this has resulted in high losses or “empty hands” for individuals using excessive leverage, it has not undermined the existing financial order. But that could change, especially since most of the crypto trading volume takes place on a Binance exchange and Stablecoin USDT is the primary vehicle for Bitcoin trading. An attack either through or through regulatory pressure could undermine the entire crypto ecosystem and the legacy financial system in which they operate.

The report also describes how stablecoins, which are often pegged 1: 1 to the USD or another fiat currency, can be regulated differently in different jurisdictions. At the same time, their market capitalization rose from about $ 20 billion to $ 120 billion last year.

Some problems are also addressed. First, “lack of disclosure” about how stablecoins are supported. In fact, the leading stablecoin USDT has been repeatedly criticized by critics for its lack of clarity about the source of reserve capital for USDT. After years of insisting that every USDT in circulation was covered by one US dollar in the bank, the company was gradually exposed. An August 2021 certification report from the Cayman Islands chartered accountant shows that roughly half of Tether’s reserves are actually commercial paper – a type of debt and certificates of deposit.

Fed chair Jerome Powell has responded to questions from Congress that commercial paper is often liquid until it suddenly becomes illiquid – often when financial crises are deep. He believes that stablecoins should be regulated in a similar way to the money markets. The IMF also supports this assessment. In an interview with the report on Yahoo Finance Live, IMF boss for money and capital markets Tobias Adrian emphasized:

“If we look at the market capitalization of stablecoins, they are comparable to some of the largest money market funds that are registered in tax havens. So this market is not small. “

In addition, the IMF notes that “some stablecoins can have unintended consequences for the financial system”. Take the stablecoin IRON, for example, whose algorithmic ecosystem collapsed in June along with an investment by Mark Cuban. Such a decline could also be due to fears that the asset might not be paid back at its full value, causing those stablecoin coffers to sell the commercial paper held in reserve.

“The risk of contagion can be much higher if currency reserves are particularly concentrated in certain industries or sectors. While this risk may currently only apply to USDT due to the number and type of assets, it could increase for other stablecoins in the future.

The IMF has not imposed any ban or restriction on how it should be handled. Adrian says:

“We will ask regulators to take a closer look at stablecoins and introduce regulation so that investors know what types of reserves meet the stability requirements.”

However, not everyone agrees with the IMF’s view. Steven Kelly, a research fellow with Yale’s Financial Stability Program, tweeted that “Uncertainty concerns aren’t limited to holding commercial paper …”.

While one popular solution suggests converting stablecoins or even cash into short-term treasury investments, both have their own limitations.

“Stablecoins used as short-term treasury assets would raise concerns about financial stability. It offers more protection to stablecoin holders, but it could also force some banking systems to share the same fate with it. Their infrastructure and risk management are becoming questionable, their relationships are limited, and they are exposed to crypto events, ”he said. tweets.

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Minh Anh

After decryption

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