I am sharing this blog from the IMF, simply because I think it really important:
Crypto Boom Poses New Challenges to Financial StabilityBy Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou |
As crypto assets take hold, regulators need to step up. 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. The latest Global Financial Stability Report describes the risks posed by the crypto ecosystem and offers some policy options to help navigate this uncharted territory. The Crypto Ecosystem—What Is It, What's at Risk? The total market value of all the crypto assets surpassed $2 trillion as of September 2021—a 10-fold increase since early 2020. An entire ecosystem is also flourishing, replete with exchanges, wallets, miners, and stablecoin issuers. Many of these entities lack strong operational, governance, and risk practices. Crypto exchanges, for instance, have faced significant disruptions during periods of market turbulence. There are also several high-profile cases of hacking-related thefts of customer funds. So far, these incidents have not had a significant impact on financial stability. However, as crypto assets become more mainstream, their importance in terms of potential implications for the wider economy is set to increase. Consumer protection risks remain substantial given limited or inadequate disclosure and oversight. For example, more than 16,000 tokens have been listed in various exchanges and around 9,000 exist today, while the rest have disappeared in some form. For example, many of them have no volumes or the developers have walked away from the project. Some were likely created solely for speculation purposes or even outright fraud. The (pseudo) anonymity of crypto assets also creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing. Although authorities may be able to trace illicit transactions, they may not be able to identify the parties to such transactions. Additionally, the crypto ecosystem falls under different regulatory frameworks in different countries, making coordination more challenging. For example, most transactions on crypto exchanges happen through entities that operate primarily in offshore financial centers. This makes supervision and enforcement not only challenging, but nearly impossible without international collaboration. Stablecoins—which aim to peg their value usually against the US dollar—are also growing at lightning speed, with their supply climbing 4-fold throughout 2021 to reach $120 billion. The term “stablecoin,” however, captures a very diverse group of crypto assets and can be misleading. Given the composition of their reserves, some stablecoins could be subject to runs, with knock-on effects to the financial system. The runs could be driven by investor concerns about the quality of their reserves or the speed at which reserves can be liquidated to meet potential redemptions. Significant challenges ahead Although the extent of the adoption of crypto assets is difficult to measure, surveys and other measures suggest that emerging market and developing economies may be leading the way. Most notably, residents in these countries increased their trading volumes in crypto exchanges sharply in 2021. Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarization forces in the economy—or in this case cryptoization—where residents start using crypto assets instead of the local currency. Cryptoization can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks, for example through funding and solvency risks arising from currency mismatches, as well as amplify the importance of some of the previously mentioned risks to consumer protection and financial integrity. Threats to fiscal policy could also intensify, given the potential for crypto assets to facilitate tax evasion. And seigniorage (the profits accruing from the right to issue currency) may also decline. Increased demand for crypto assets could also facilitate capital outflows that impact the foreign exchange market. Finally, a migration of crypto “mining” activity out of China to other emerging market and developing economies can have an important impact on domestic energy use—especially in countries that rely on more C02-intensive forms of energy, as well as those that subsidize energy costs—given the large amount of energy needed for mining activities. Policy action As a first step, regulators and supervisors need to be able to monitor rapid developments in the crypto ecosystem and the risks they create by swiftly tackling data gaps. The global nature of crypto assets means that policymakers should enhance cross-border coordination to minimize the risks of regulatory arbitrage and ensure effective supervision and enforcement. National regulators should also prioritize the implementation of existing global standards. Standards focused on crypto assets are currently mostly limited to money laundering and proposals on bank exposures. However, other international standards—in areas such as securities regulation, as well as payments, clearing and settlements may also be applicable and need attention. As the role of stablecoins grows, regulations should be proportionate to the risks they pose and the economic functions they serve. For example, rules should be aligned with entities that provide similar products (e.g., bank deposits or money market funds). In some emerging markets and developing economies, cryptoization can be driven by weak central bank credibility, vulnerable banking systems, inefficiencies in payment systems and limited access to financial services. Authorities should prioritize strengthening macroeconomic policies and consider the benefits of issuing central bank digital currencies and improving payment systems. Central bank digital currencies may help reduce cryptoization pressures if they help satisfy a need for better payment technologies. Globally, policymakers should prioritize making cross-border payments faster, cheaper, more transparent and inclusive through the G20 Cross Border Payments Roadmap. Time is of the essence, and action needs to be decisive, swift and well-coordinated globally to allow the benefits to flow but, at the same time, also address the vulnerabilities. |
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Hi Richard,
Central Banks issuing their own crypto misses the point that a major aim is to move away from centralised control. But I do take your point that governments need to get their act together.
Regards
Charlie
I like to think I am a reasonably intelligent person with an enquiring mind but having spent several years trying to understand crypto currencies I give up. Nobody (and I have spoken to a lot of smart believers) has been able to explain to me what benefit they deliver.
There is nothing new about stablecoins – their equivalent have been issued by all sorts over the centuries, often for good reason – mainly a shortage of “real” money that hampers economic development. But they carry huge risks and have usually ended in tears as owners of these private currencies find they become unacceptable to use for paying debts and non-convertible into legal tender as the supposed collateral backing the “currency” proves to be illusory. We should note that NONE (except HKD, if that really counts??) have stood the test of time in the past. What is the purpose of TETHER and would you accept it in the real economy for payment (in preference to USD)?
I DO kind of understand Bitcoin… but only in the sense that it is a new “collectible”… but volatility makes it useless as a currency. I would rather take gold as a store of value over Bitcoin – not for intrinsic value but historical track record and widespread acceptability.
Policymakers have a real dilemma. The obvious approach is to say “caveat emptor” and wash their hands of it… but what about money laundering? And, if it all goes belly up is it really OK for them to just say “I told you so”?
I don’t envy them.
I would be delighted to be educated by your other contributors……
I do agree with your opening sentence
And the rest too
Like many others, I’m unsure of the merits of cryptocurrencies except for enabling speculation and a huge drain on energy during ’mining’
However i think I understand that most of them rely on Blockchain — “The creation, record-keeping, and transfers that are essential to Bitcoin rely on the innovative database and network capabilities of Blockchain.” – https://coinwut.com/cryptocurrencies-use-blockchain-types/
The fact that China has created the blockchain yuan is I think important – https://www.iss.europa.eu/content/chinas-blockchain-and-cryptocurrency-ambitions
If Blockchain enables a state to ‘see’ all transactions in this form of ‘currency’ then the state has ultimate control of the currency, where it is used and abused and tax evasion and currency speculation in all forms becomes impossible.
Or am I missing something….
All markets are rigged in one way or another, generally by the parties that make the most use of those markets. Ordinary currency markets are “managed” by the central banks. Crypto currency markets are managed by the arms dealers, people trafficers, ransom hackers, drug dealers etc. that use those currencies. Take your pick as to which you trust most (or distrust least!).
Generating electricity to power the data centres that are needed to mine for and process crypto currencies a major and the fastest growing source of greenhouse gas emissions.
Perhaps one should not expend too much energy on “understanding” these opaque assets, but concentrate on the direct comparison with the CDOs fabricated originally from the insanity of the US sub prime mortgage market in the period leading up to the 2007/8 implosion. If an opaque asset appears anywhere at anytime, it is always for undesirable reasons and contrived opaqueness is the only marker necessary to identify them. All should be seen as a potential threat to stability in the longer run and all should be seen as directly undermining the ability of government to manage economies. All of them operate to increase wealth disparities in favour of the existing elites. The only appropriate policy response is to wage war on them and criminalise participation. Of, course, I recognise this is a fantasy, but that does not make it incorrect. Transparency and regulation are the twin bases of sound economies. Anything interfering with those objectives require no analysis to conclude it must be prevented.
Our current system is not transparent – MMT would not have had such a long lead-time to gain understanding and popular support.
Regulation is not sufficient to prevent abuse though extensive money-laundering, profit shifting and suspicious financial derivatives to minimise risk etc etc.
My reading of what the Chinese are up to with Blockchain will give the Chines state ultimate control – here’s an extract from the ISS Europa article –
“The digital yuan, officially known as the digital currency electronic payment (DCEP), is envisaged as a central bank digital currency (CBDC) and has the same legal status as the regular yuan, with its value tied to it ……
the digital currency has the potential to substantially increase the central bank’s oversight of transactions. According to the 2019 regulation of the Cyberspace Administration of China, the banks and electronic payment companies that will distribute the new digital currency already require users to authenticate their real names as well as national identification card numbers, and the central bank will be able to view data on transactions . Hence, China’s digital currency will substantially increase control over the population, whose financial dealings will be easily trackable by the central authorities. They will no longer need to obtain customer information from payment companies to monitor citizens’ transactions”.
read – https://www.iss.europa.eu/content/chinas-blockchain-and-cryptocurrency-ambitions.
If China is successful with blockchain will the rest of the world have to follow with their own national systems and will this make regulation easier and abuse almost impossible?
I don’t know if my perspective helps…………..
To me, I’d sum up crypto as .I.T. derived money. The pound for example arguably started off as a coin and then turned into notes and ledgers and finally ended up being digitised (but co-exists with its former selves when in use in the economy). But crypto started off as purely digital first from what I can see.
I have Christine Desan’s book ‘Making Money’ which I hope to read soon and I think the history of the pound would be a good way to contrast and reflect on the creation of crypto-currency which might very well help us to arrive at some firmer conclusions about crypto. Much or the lore and law about how money was created – how it developed and continues to develop – might be instructive about crypto and throw up some warning signs.
There are lots of pluses to this as I.T. can indeed create traceable transfers of information. We know how useful I.T. is etc., but we also know it has a dark side, because there are actors behind actors and transactions and interactions. Working out what is authentic and what is false is a different game on the internet and on our PCs and laptops.
When one considers how fallible I.T. is then I’d stop right there, turn away and keep well away from crypto-currencies. It’s not just a Government that can control a crypto-currency – I think anyone can to be honest. And that’s the problem. How secure is a crypto-currency – in a world of I.T. warfare and bad actors? I.T. is like the wild west. How can a Government protect its crypto-currency when its spending power is clipped by budgets held back by false contemporary thinking on Government debt and then compete against monied vested interests and out and out criminality?
Crypto is simply riding on the wave of the promise of democracy and openness that the I.T. and WWW developers promised in the early days of their work and which now has been successfully corporatised and turned into a monopoly operation all of its own. Let us as least be honest about that (yes I know that there is still open access development going on – but its not huge is it?).
I also don’t like the fact that crypto-currencies challenge established Government backed currencies. The neo-lib Randian ideologists will orgasm on its potential to get out of taxes and stuff like that. We’ll be told that we are free of state intervention but not told that part of that freedom (or a cost) is that there will be people out there using the crypto system for the more malign reasons and that it is risky as a result.
A financial system allowing two currencies to exist side by side (a state sponsored pound with a stateless crypto currency) is worrying to me as crypto potentially harms the exclusivity value of the state sponsored one. Reading Timothy Snyder and how Governments making people stateless so that they effectively have no rights so that the rules of national law do not apply to them (like the Nazis did to the Jews) makes me wonder what abuses there might be with a stateless crypto currency. Is it every man for him/herself? It’s incredibly risky and have nations agreed about how to manage it yet?
In many ways, China’s interest in crypto is brave and unusual and has a tang of intervention about it. If they go in big, they know why – because crypto will still have to have rules applied to it so that it is stable and not just a scam currency. What good is a currency to a sovereign nation which is so uncontrolled that any bad actor can come along and just steal Government money time and time again?
Of course I realise that existing money markets denominated in sovereign currencies are not as stable as we would like them to be and are open to abuse from bad actors in existing markets too. But this is not something to be blamed onto established currencies. Blame lies with orthodox economic thinking and management that hobbles Government action, relaxes regulation and narrows down economic management to concentrating (say) on just one metric like inflation. What’s worse is that retarding Government power makes the attraction of crypto-currencies stronger.
Contrast China with the sleepier reaction of the West whose market orientated ‘open mindedness’ is just ripe to be taken advantage of by bad actors.
But the big issue for me is how does crypto become a legalised medium of exchange in the sense that people can actually realise it by collecting their money in the form of cash and legal tender? If there was a bank crash – could account holders go to their crypto bank and pull their crypto money out and put it into an account denominated in the pound of the dollar? Or would it simply – as it has – just disappear?
In my view we already have digitised money under pinned by the authority of the state. That’s good enough for me. Not for others it seems and I simply don’t trust their motives. It’s dodgy – unless, like China the worlds’ Governments get their arses into gear and lay down some rules and security on the systems.
And BTW, we should be calling it ‘Cryptic currency’ as to me it is still not clear who the idea actually benefits.
Thanks
A consensus appears to be emerging here
I have to say that the ignorance of what bitcoin is and how it works shown here is astounding though understandable. For example the much repeated “it uses too much electrical power”/ “what about it’s carbon footprint” arguments. It’s important to understand that many environmental concerns are exaggerated or based on flawed assumptions or misunderstandings of how the Bitcoin protocol works.
That means that when we ask, “Is Bitcoin worth its environmental impact,” the actual negative impact that’s talked about is likely a lot less alarming than you might think. But there’s no denying that Bitcoin (like almost everything else that adds value in our society) does consume resources. As with every other energy-consuming industry, it’s up to the crypto community to acknowledge and address these environmental concerns, work in good faith to reduce Bitcoin’s carbon footprint, and ultimately demonstrate that the societal value Bitcoin provides is worth the resources needed to sustain it.
Bitcoin is twelve years old, and if it is a Ponzi scheme is a very long running one. In those twelve years it has been the best performing asset most years, where the more traditional form of “store of value” gold has performed dismally. Where is gold now inflation is creeping in? It should be taking off not sliding down as it is doing.
I have a wide range of assets including gold and bitcoin but bitcoin is the one that I feel has the greatest potential as a store of value. As the world digitises we will need digital assets and bitcoin is the leading digital asset and it’s platform the bitcoin network is the the future for transferring value around the globe. The lighting network built on the bitcoin network means that I can transact in one currency, exchange into bitcoin and cross the globe via the bitcoin network be exchanged into dollars or what other currency the recipient is using in a blink of an eye for a fraction of a penny. It’s coming and it will be unstoppable.
I am posting it but add that I think it is completely wrong – from the environmental impact onwards
I think it takes an exceptional naivete at best to believe what this person – who appears not to have commented here before – says
Mr Morrow talks of ignorance but mostly ignores the so-called ignorance and just concentrates on the environmental impact. If he has more to say he should say it – answer the charges, reassure the worried.
But as we can see, maybe he has that narrow-minded investor mentality – his investment has made him money (he has not been robbed blind – yet) so crypto must be a good thing and sod anything else it seems. And that’s what happens isn’t it – and all is good the world until it isn’t. But hey – your Government will bail you out won’t they – because your money is valued – labour less so.
I’ll say again the world of tech will tell us about the freedoms and openness of their ideas only to allow monopolies and criminality later – that’s unstoppable too. Crypto is very new – should it be subject to the same rules and legal stature as established money? I think it should at least – crypto should not be an exception to anything as far as I am concerned.
As for Geoff Wood I get his point. However, let us question his assertion ‘that regulation itself is not sufficient’.
I would say that what we have had is insufficient regulation.
We know for a fact that orgs like the SEC in the U.S were gutted by successive administrations in the so-called ‘bonfire of red tape’; we know that regulation of over the counter derivatives was also prevented by the likes of Larry Summers; that the FBI knew about the mis-selling of mortgages in the U.S but was told to deal with 9/11 instead – all three of these deliberate actions – and others – took us on the road to 2008.
In the UK, Richard rails against poor accounting practice – and lets not forget ENRON in the U.S – and the state of companies house.
Regulation fails because as it is now, it’s crap. It’s underfunded and undermanned. And also because our financial system lacks morality – giving a green light to any bad actor in the system wanting to make a quick buck. What else would you say about a system that allows something culturally treasonable as a credit default swap – where you can literally ensure someone else’s asset and benefit from its problems – try to ensure you neighbour’s house or car with your insurer and see what they say.
And we want to introduce a new form of money? What – into this pit of vipers called the world financial system? Yeah right!
I applaud the Chinese wanting to oversight of financial transactions except perhaps were it by a funder of a pro-democracy group in Hong Kong. But is that sort of oversight after the fact? Shouldn’t there be more rules for prevention and enough people watching. My view? There should. Because there aren’t.
And the worst of this is that if crypto were to become popular and there was a scam – like the CDO mortgage scam of 2008 – of course the big investors would get bailed out wouldn’t they by their sovereign Governments who would have to bail out crypto – another level of risk – on an over-inflated value no doubt.
And then those sovereign Governments would turn around to their citizens, claim that their pockets were now empty and there needed to be changes. Not in the financial system of course – but concerning citizens rights to being helped by their Governments.
And if that came to pass (again!), some creatures in this world would call that a good days’ work. I kid you not.
And that’s why I remain deeply sceptical about crypto – we learnt in 2008 that ‘securitisation’ actually increased risk in the world financial system (listen to Satyajit Das on this). To me, crypto – injected into the existing failing system that is too loosely regulated is just another means of increasing as well as spreading risk.
Thanks
There was some discussion on the electrical generation in Ireland and the forecast requirements on the Irish news a couple of days ago. The progressive installation of wind turbines has reduced dramatically I the last few years and the peat fired power stations have been shut down. The base load is now dependent on a large number of gas fired stations, large rises in electrical power costs are forecast plus the carbon tax the Irish government are introducing next year.
Currently data storage which the government is promoting, is current using 10% of the whole country and is planned to go up to 40% within 10 years???
I admit I do but really follow your comment
Anyone who’s spent anytime talking to ‘gold bugs’ can instantly recognize crypto currencies as the technological equivalent of ‘gold’ – they even use the term mining. Personally, I’d ban it on the grounds of energy use. No-one trading in crypto-currencies is paying for their appalling use of energy and the consequential damage to the environment. Govts could slap an enormous tax on crypto trading and it would soon come to an end.
@Neil – seconded!
I would be interested to have Richard’s and others views on whether crypto currencies are really currencies or simply another invented form of asset, of which perhaps the latest example is non-fungible tokens (NFTs). Assets range in kind on a scale from real (land, houses, machines, clothes) through cultural (e.g. great art) to imaginary types like these that do not have any value except in people’s acceptance of them. They seem a bit like the emperor’s new clothes. Is their proliferation to satisfy the need of the rentier class for somewhere to stash their profits? And if so, would it be good for the rest of us if the value of crypto currencies and NFTs fell to zero tomorrow?
My answer is that they are not currencies, having no legitimacy (literally) as such
They are synthetic intangible assets and the IMF says the rest…
Everyone I have personally asked about Bitcoin always praise it as a money making machine, but never ever explain how it all works.
If we can make money for doing nothing I always think it is a scam. perhaps people that fully understand it could explain how you mine for bitcoin without having to use real money to buy it?