IMF Criticizes Crypto Boom, Warns of Global Risks
October 26, 2021
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by Stephen Kanyi

The rapid growth of crypto in recent years has attracted quite a lot of criticism. This time from one of the largest financial institutions in the world, the IMF. In excerpts from its forthcoming Global Financial Stability Report, the IMF calls for tougher regulations to curb the rapid growth of digital coins. IMF warns that digital coins lead to financial instability, used to fund terrorism and defraud consumers.

The Washington based financial giant decried the rapid growth of crypto assets by a massive 1000% in recent years. This puts the global market value of digital assets at slightly over $2 trillion. Such numbers, IMF says, necessitate the need for more government supervision and active collaboration between stakeholders.

Explaining on a blog, IMF economists Dimitris Drakopoulos, Fabio Natalucci and Evan Papageorgiou argue that crypto exchanges present high risks to consumers.

“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,”

They go on to note that inadequate oversight and disclosure had presented substantial risks to consumers. Some of these currencies were supposedly “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.”

The IMF also took aim at stablecoins noting the four-fold increase in their supply putting their value at slightly over $120 billion.

They say: “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.”

IMF is however not alone in its critique of digital coins. Last month China completely banned all mining and trading of cryptocurrencies within the country. IMF however argues that despite these bans, crypto mining and trading is simply shifting to emerging and developing countries. Kenya, for instance, is among the leaders in Bitcoin transaction volume.

Moreover, while some developed nations such as China are stamping down on digital coins others are actively embracing it. The US especially has benefitted from the China ban. The United States now accounts for the largest share of global bitcoin mining, some 35.4% of the global hash rate as of the end of August. They are followed by Kazakhstan and Russia respectively.

In addition to the inherent risk of using digital coins, there has also been a lot of discussion surrounding the actual value of cryptocurrencies. Some argue that these coins are not an actual store of value and therefore cannot be a means of exchange.

Youpal CFO Rajka Stjepanovic says:

“When they started with Bitcoin a few years ago, I believed that is a huge hoax. That’s my opinion. There’s no real value behind cryptocurrency.

I see that people believe they will earn a huge amount in a short time when they invest in cryptocurrency. I don’t believe in that. I think it’s basically showing people how to invest their money in the market and make it grow into returns. But the fluctuations in these currencies show that there is some manipulation. What happens is people follow the trends and invest when there are these sharp peaks… but then are disappointed when it swings the other way.

That’s precisely the problem. Behind these currencies, there is no real value. There is nothing. For me, I am expecting a serious problem to arise as I don’t think it’s something sustainable in the long term.”

Calls for more crypto regulation from large financial institutions is definitely going to attract more attention from governments worldwide. Some will heed the call and some will do the complete opposite. That is how I see the future, divided into two groups; those that want to retain their control over the global financial system and those that are willing to let go. I personally hope the latter win.

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