What has happened?
International Monetary Fund (IMF) Deputy Managing Director Tao Zhang has said that policymakers should strike "a sensible balance" to maximise the potential of new technologies, such as blockchain.
What does this mean?
Zhang has urged regulators to create a supportive space for innovation, while maintaining a robust regulatory framework to protect consumers and financial stability.
Speaking at the Atlanta Federal Reserve Bank Conference earlier this week about the digitisation money and finance, Zhang said that, for now, cryptoassets "are still relatively insignificant compared with conventional assets, and, so far, they do not pose a threat to macro-financial stability".
However, he believed that this could change and therefore suggested that regulators and central banks follow four points:
- Regulators should complement their focus on entities with increasing attention to activities as an increasingly diverse group of firms and market platforms are providing financial services.
- Governance needs to be strengthened to ensure that consumers or the financial system are not exposed to undue risk.
- Policy options could be considered to support open networks, and licensing policies could be adjusted to help foster competition.
- Legal principles need to be modernised. Maintaining trust in financial services may also require the development of new legal frameworks to clarify rights and obligations within the new financial landscape.
According to Zhang, some regulators have started addressing some of these challenges, but the development of effective regulations is still at an early stage.
"Crypto-assets exemplify the difficulties that regulators face in the fast-changing realm of Fintech. They are difficult to regulate because they cut across the responsibilities of different national agencies, and operate on a global scale. Many are opaque and outside of the conventional financial system, making it difficult to monitor their operations", he said.
According to Zhang, the bottom line is that policymaking will need to be "nimble, innovative, and co-operative".
He also discussed how financial services may be transformed by the adoption of financial technology before examining how the rise of cryptoassets may pose challenges to financial integrity and stability.
For Zhang, both opportunities and risks are associated with cryptoassets.
On the positive side, he said that some useful technology is being developed to improve market efficiency.
"For example, services have slashed from days to minutes the time it takes for cross-border payments to reach destinations."
However, as with other forms of FinTech, cryptoassets also "have the potential for criminal activities".
They can, for example, mask identities, which makes them attractive to money laundering, terrorist financing, tax evasion and fraud.
Earlier this year, the IMF called for global co-ordination on cryptocurrencies and warned of the risks of surging cryptocurrency prices and IMF Managing Director Christine Lagarde also said in February that international regulatory action was "inevitable".
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