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By: Nghiinomenwa Erastus

The acceleration of cryptoization in emerging economies can circumvent exchange and capital control restrictions without a regulatory framework.

The International Monetary Fund (IMF) highlighted in its Global Financial Stability Report, October 2021.

While noting that the financial stability risks are not systemic, risks should be closely monitored given the global implications and the inadequate operational and regulatory frameworks in most jurisdictions.

In its analysis titled the Crypto Ecosystem and Financial Stability Challenges, the international lender explained that the crypto ecosystem offers an exciting new world of opportunities and challenges.

Risks to consumers can arise from a lack of operational or cyber resilience associated with crypto asset providers.

Anonymity in trade and limited global standards create significant data gaps for regulators and pose risks to financial integrity.

IMF researchers wrote that the advent of crypto assets and stable coins in emerging markets and developing economies might also accelerate dollarization (use of different currency/loss of currency autonomy) risks.

They added that “increased trading of crypto assets in these economies could lead to

destabilizing capital flows”.

The crypto ecosystem continues its rapid growth, presenting both opportunities and challenges.

However, the IMF warns of macro-financial challenges depending on the

degree of crypto adoption.

The international lender singled out emerging and developing economies as a recent survey indicated the top five countries using or owning crypto assets in 2020 were emerging market and developing economies.

Compared to advanced economies, according to the survey, they consulted.

Crypto assets come in different flavours and have evolved to meet varying needs for speculative investment, store of value, currency conversion, and payments.

There are several driving forces for cryptoization, such as unsound macroeconomic policies combined with inefficient payment systems in some emerging markets and developing economies boost crypto adoption.

Some potential pull factors for crypto adoption, such as speculative retail investing, may be shared across countries.

Regardless of its use, a virtual asset does not meet the criteria for consideration as a fiat currency in Namibia. Still, it can be readily exchanged for funds, goods, or for other virtual assets amongst parties who choose to do so.

According to IMF analysis, the cryptoization could also pose a threat to fiscal policy.

The research stated that “crypto-assets can facilitate tax evasion, and seigniorage revenue may also decline due to the shrinking role of central bank money in the economy”.

As crypto-assets grow, the macro-criticality of such risks is likely to increase, the IMF team wrote.

In addition, the crypto ecosystem remains exposed to concentration risks, including operational and financial integrity risks from crypto asset providers and investor protection risks for crypto assets.

The IMF assessment highlighted that increased demand for crypto assets could facilitate capital outflows that affect the foreign exchange market.

Crypto exchanges play the crucial role of facilitating the conversion of local currency to crypto-assets and vice versa.

“The natural demand and supply for conversions can easily become unbalanced,” the Fund wrote.

The mining of coins revenue can potentially be used to circumvent capital flow restrictions and international financial sanctions.

The main operating costs of miners (for example, electricity) are typically paid domestically in local currency, but their revenues are paid on-chain in crypto assets.

One sector faces stiff competition in the banking sector if the crypto ecosystem becomes an alternative to domestic bank deposits or even loans.

“Stronger competition for bank deposits through stable coins held on crypto exchanges or private wallets may push local banks,” the IMF researchers found.


The Fund advises governments to strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies.

“Policy measures can be somewhat effective at ring-fencing the impact of rising crypto-asset demand in the foreign exchange market,” the researchers advised.

Capital flow management measures and other crypto-asset-specific measures can have a notable impact on creating market segmentation.

Policymakers should implement global standards for crypto-assets and enhance their ability to monitor the crypto ecosystem by addressing data gaps.

The Fund has also highlighted that the regulations should correspond to the risks they pose and the economic functions they perform.

As a first step, regulators and supervisors need to monitor rapid developments and the risks they create.

Depending on country circumstances, various forms of crypto-assets may be adopted, and their economic functions may vary.

The researchers have advised authorities to consider enhanced disclosure

requirements, independent audit of reserves, fit and proper rules for network administrators and issuers.

Moreover, laws around enhanced operational and cyber resilience reflect the increased reliance on digital platforms and various types of distributed ledger technology.

The IMF team indicated that crypto products could be more complex and less transparent with significant technological and governance risks arising from faulty computer code.

The assessment has also acknowledged the lack of central intermediaries complicates authorities’ efforts to monitor and regulate virtual assets.

As a result, many products contain “risk disclosures that do not adequately warn

against their large and volatile returns,” IMF stated.

While the anonymity of crypto assets and limited global standards create significant data gaps for regulators- transactions can only be traced till the blockchains they were executed on.

“They may not be able to identify the parties to a transaction,” the Fund said.

The international lender has also acknowledged that the crypto ecosystem falls under varied regulatory frameworks across countries.

It results in little or no monitoring and information sharing across jurisdictions.

This is despite some progress through the anti-money laundering and financial proliferation obligations for crypto-asset providers set out by the Financial Action Task Force (FATF).

Their implementation is still at an early stage, with notable delays in critical areas such as the ‘travel rule’, the IMF noted.

Furthermore, monitoring the activity of crypto-asset service providers is complicated by limited, fragmented, and, in some cases, unreliable data.

“Public data sharing by crypto asset providers is currently mostly voluntary

and lacking standardization,” wrote the research team. Email:

Julia Heita

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