IMF Recommends 5‑Point Crypto Regulation Scheme

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As glob­al influ­encers rubbed elbows at Davos, the IMF issued rec­om­men­da­tions for cryp­to to glob­al reg­u­la­tors. Depend­ing on who you ask, cryp­to reg­u­la­tion could hurt the indus­try or open up vast new mar­kets for normie investors.

In a note pub­lished over the week, the Inter­na­tion­al Mon­e­tary Fund wrote:

“Dur­ing times of stress, we’ve seen mar­ket fail­ures of sta­ble­coins, cryp­to-focused hedge funds, and cryp­to exchanges, which in turn raised seri­ous con­cerns about mar­ket integri­ty and user pro­tec­tion. And with grow­ing and deep­er links with the core finan­cial sys­tem, there could also be con­cerns about sys­temic risk and finan­cial sta­bil­i­ty in the near future.”

The IMF’s pre­ferred approach to counter these con­cerns is increas­ing glob­al cryp­to regulation:

“Many of these con­cerns can be addressed by strength­en­ing finan­cial reg­u­la­tion and super­vi­sion, and by devel­op­ing glob­al stan­dards that can be imple­ment­ed con­sis­tent­ly by nation­al reg­u­la­to­ry authorities.”

The rec­om­men­da­tions are:

1) License, reg­is­ter, and autho­rize cryp­to asset providers. 2) Pro­hib­it cryp­to enti­ties from car­ry­ing out mul­ti­ple func­tions in one busi­ness that cre­ate con­flicts of inter­est. 3) Apply strong, bank-type reg­u­la­tion to sta­ble­coin issuers. 4) Impose clear require­ments on tra­di­tion­al finan­cial insti­tu­tions for expo­sure or engage­ment with cryp­to. 5) Cre­ate a con­sis­tent glob­al approach to cryp­to reg­u­la­tion and oversight.

Posing a Threat?

While it seems unlike­ly that the entire world could agree on cryp­to reg­u­la­tions, the pos­si­bil­i­ty of a glob­al reg­u­la­to­ry regime seems sti­fling. After all, Bit­coin was invent­ed in the first place to side-step the glob­al finan­cial system.

In the view of Bitcoin’s cre­ators and ear­li­est adopters, it was the glob­al finan­cial sys­tem that was the con­ta­gion with spillover risk. Reg­u­la­tions did noth­ing to stop a finan­cial down­turn much big­ger than the cryp­to win­ter from shock­ing glob­al mar­kets in 2008.

In fact, it’s even pos­si­ble that finan­cial reg­u­la­tions are what led to the 2008 finan­cial cri­sis. The cen­tral bank’s reg­u­la­tion of the mon­ey sup­ply was dovish in the years lead­ing up to that. This encour­aged ram­pant spec­u­la­tion in exot­ic instru­ments with bor­rowed mon­ey at low-inter­est rates.

For Better or Worse?

As the mon­ey veloc­i­ty of the econ­o­my churned and reval­ued each dol­lar accord­ing to the con­stant­ly grow­ing new sup­ply of USD, the same thing hap­pened to Wall Street that hap­pened to Alame­da-FTX. They were hold­ing on to all these assets that weren’t real­ly worth what they said on paper.

A glob­al reg­u­la­to­ry regime with inflex­i­ble, one-size-fits-all rules put togeth­er by com­mit­tees could eas­i­ly squash a project as impor­tant as Bit­coin before it has a chance to get started.

Or per­haps just as eas­i­ly inspire one and cede con­trol to an ecosys­tem of peer-to-peer net­work gov­er­nance cob­bled togeth­er ad hoc by devel­op­ers, entre­pre­neurs, and the mar­kets they serve.

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