Copyright Page
IMF POLICY PAPER
ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS
February 2023
IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its February 8, 2023 consideration of the staff report.
The Staff Report, prepared by IMF staff and completed on January 4, 2023 for the Executive Board’s consideration on February 8, 2023.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Electronic copies of IMF Policy Papers are available to the public from http://www.imf.org/external/pp/ppindex.aspx
International Monetary Fund
Washington, D.C.
© 20[xx] International Monetary Fund
Press Release
PR23/51
Press Release – IMF Executive Board Discusses Elements of Effective Policies for Crypto Assets
FOR IMMEDIATE RELEASE
Washington, DC – February 2, 2023: On February 8, 2023 the Executive Board of the International Monetary Fund (IMF) discussed a board paper onElements of Effective Policies for Crypto Assets that provides guidance to IMF member countries on key elements of an appropriate policy response to crypto assets. The paper’s objectives are in line with the IMF’s mandate to support economic and financial stability across its membership. The paper addresses questions raised by IMF member countries on benefits and risks of crypto assets and on how to structure appropriate policy responses. It operationalizes the principles outlined in the Bali Fintech Agenda (IMF and World Bank 2018) and includes macrofinancial considerations such as implications for monetary and fiscal policies. The proposed principles are fully aligned with the relevant standards of the Financial Stability Board and other standard setting bodies.
Efforts to put in place effective policies for crypto assets have become a key policy priority for authorities, amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn.
The paper sets forth a framework of nine elements that can help members develop a comprehensive, consistent, and coordinated policy response. The nine elements—or policy actions—are:
1. Safeguard monetary sovereignty and stability by strengthening monetary policy frameworks and do not grant crypto assets official currency or legal tender status.
2. Guard against excessive capital flow volatility and maintain effectiveness of capital flow management measures.
3. Analyze and disclose fiscal risks and adopt unambiguous tax treatment of crypto assets.
4. Establish legal certainty of crypto assets and address legal risks.
5. Develop and enforce prudential, conduct, and oversight requirements to all crypto market actors.
6. Establish a joint monitoring framework across different domestic agencies and authorities.
7. Establish international collaborative arrangements to enhance supervision and enforcement of crypto asset regulations.
8. Monitor the impact of crypto assets on the stability of the international monetary system.
9. Strengthen global cooperation to develop digital infrastructures and alternative solutions for cross-border payments and finance.
By adopting the framework, policy makers can better mitigate the risks posed by crypto assets while also harnessing the potential benefits of the technological innovation associated with it.
Executive Board Assessment
Executive Directors welcomed the opportunity to discuss the board paper on elements of effective policies for crypto assets. They noted the timeliness and importance of the paper, as well as its relevance to the IMF’s wide and diverse membership, and generally underscored the need for a comprehensive framework. They considered that the growing adoption of crypto assets in some countries, the extra-territorial nature of crypto assets and its providers, as well as the increasing interlinkages with the financial system, motivate the need for a comprehensive, consistent, and coordinated response.
Directors generally observed that while the supposed potential benefits from crypto assets have yet to materialize, significant risks have emerged. These include macroeconomic risks, which encompass risks to the effectiveness of monetary policy, capital flow volatility, and fiscal risks. They also noted serious concerns about financial stability, financial integrity, legal risks, consumer protection, and market integrity. Against this backdrop, Directors broadly welcomed the proposed framework and its elements.
Directors agreed that crypto assets have implications for policies that lie at the core of the Fund’s mandate. In particular, the widespread adoption of crypto assets could undermine the effectiveness of monetary policy, circumvent capital flow management measures, and exacerbate fiscal risks. Widespread adoption could also have significant implications for the international monetary system in the longer term. Directors, therefore, emphasized that robust macroeconomic policies, including credible institutions and monetary policy frameworks are first-order requirements and that Fund advice in these areas will remain crucial. Directors generally agreed that crypto assets should not be granted official currency or legal tender status in order to safeguard monetary sovereignty and stability. Fiscal risks posed by crypto assets including contingent liabilities to the government should be fully disclosed as part of countries’ fiscal risk statement, and the applicability of tax regimes should be clarified.
Directors broadly agreed on the need to develop and apply comprehensive regulations, including prudential and conduct regulation to crypto assets, and effective implementation of the FATF standards on AML/CFT. They noted that the Fund should work closely to support the regulatory work under the leadership and guidance of standard-setting bodies. In this context, Directors emphasized the importance of fully aligning the framework with the initiatives and standards set by the standard-setters. Directors agreed that strict bans are not the first-best option, but that targeted restrictions could apply, depending on domestic policy objectives and where authorities face capacity constraints. A few Directors, however, thought that outright bans should not be ruled out. Directors noted that regulation should be mindful not to stifle innovation, and the public sector could leverage some of the underlying technologies of crypto assets for their public policy objectives.
Directors emphasized the importance of prioritizing elements of the framework where countries face implementation challenges, including weak regulatory institutions. They stressed that the pace and sequencing of implementation should be tailored to countries’ respective circumstances. It will be important to underpin the regulatory treatment with clear and sound private and public law frameworks. Strong coordination between authorities, both at the domestic and international levels, is critical for consistent implementation and avoiding regulatory arbitrage. Directors also highlighted the importance of promoting the principle of “same activity, same risk, same regulation.”
Directors agreed that the framework should be used to guide staff’s policy dialogue with country authorities and capacity development activities, as well as participation in discussions with standard-setting organizations. They underscored the need to focus on the Fund’s comparative advantage and on macrofinancial implications. They also saw a role for the Fund in serving as a bridge between the experience of its membership and the international standard- and rule-setting process, including disseminating best practices. Directors underscored the importance of tailored advice and close dialogue with authorities, given the different stages of development of crypto assets and different capacities among member countries. Fund capacity development support will be crucial.
Directors stressed the importance of addressing the significant data gaps and emphasized the role of the Fund in monitoring risks and impacts on the international monetary system. They welcomed in this context the new G20 Data Gaps Initiative. Consistent recording of crypto assets in macroeconomic statistics across economies, underpinned by a reliable data framework, will be important.
Looking ahead, Directors emphasized that the Fund could serve as a thought leader in further analytical work on rapidly evolving developments in crypto assets. They underscored the importance of promoting ongoing knowledge sharing and lessons from practical implementation issues in the field. Fund work on crypto assets is expected to remain within the agreed budget augmentation framework.
Title page
ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS
January 4, 2023
EXECUTIVE SUMMARY
Crypto assets have existed for more than a decade, but efforts to put in place effective public policies toward them have moved to the top of the global policy agenda only recently. This is partly because crypto assets, after years of being niche products, are now being held and in some instances used more widely. The growth in their market capitalization has been volatile, and their interconnectedness with the financial sector has increased. Amid the decline in crypto asset valuations, the failure of various exchanges (such as FTX) and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets (like Terra USD), have intensified the need for effective policies toward these assets.
This paper aims to address questions by Fund members on how to respond to the rise of crypto assets and the associated risks. To frame the discussion, the paper defines and classifies crypto assets based on their underlying features and describes their purported benefits and potential risks. The paper presents a policy framework for crypto assets that aims to achieve key policy objectives such as macroeconomic stability, financial stability, consumer protection, and market and financial integrity. The framework outlines key elements that are necessary to ensure that these objectives are met. However, such a framework will not fix any underlying crypto design flaws (for instance, the lack of a credible nominal anchor, payments finality, or scalability).
Purported benefits of crypto assets include cheaper and faster cross-border payments, increased financial inclusion, and greater portfolio diversification. Greater operational resilience, and increased transparency and traceability of transactions, are also often presented as benefits. However, a careful consideration of these purported benefits suggests that many have not yet materialized, although the underlying technological innovations could prove useful in the longer term.
There are many risks associated with crypto assets, although the significance and relevance of specific risks differ by country circumstances. These include macroeconomic risks, which encompass risks to the effectiveness of monetary policy, capital flow volatility, and fiscal risks. There are also serious concerns about financial stability, financial integrity, legal risks, consumer protection and market integrity, and contestability. Some risks are inherent to the technology underpinning crypto assets, while others stem from the lack of policies or their enforcement. Enforcement could be particularly challenging as many crypto asset service providers are located in offshore jurisdictions but market their services globally.
To address the risks of crypto assets, and harness benefits from underpinning innovative technologies, this paper puts forward nine core elements of an effective policy framework:
1. Safeguard monetary sovereignty and stability by strengthening monetary policy frameworks and do not grant crypto assets official currency or legal tender status.
2. Guard against excessive capital flow volatility and maintain effectiveness of capital flow management measures.
3. Analyze and disclose fiscal risks and adopt unambiguous tax treatment of crypto assets.
4. Establish legal certainty of crypto assets and address legal risks.
5. Develop and enforce prudential, conduct, and oversight requirements to all crypto market actors.
6. Establish a joint monitoring framework across different domestic agencies and authorities.
7. Establish international collaborative arrangements to enhance supervision and enforcement of crypto asset regulations.
8. Monitor the impact of crypto assets on the stability of the international monetary system.
9. Strengthen global cooperation to develop digital infrastructures and alternative solutions for cross-border payments and finance.
These elements can help inform a comprehensive, consistent, and coordinated framework for crypto assets. However, it is important to note that individual countries will face different circumstances and capacity constraints that may influence the sequence in which these elements are implemented. Doing nothing is untenable as crypto assets may continue to grow in popularity despite the current downturn. By adopting this framework, policy makers can effectively mitigate the risks posed by these assets while also harnessing the potential benefits of technological innovation.
Approved by
Tobias Adrian, Vitor Gaspar, Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, and Rhoda Weeks-Brown
Prepared by an inter-departmental team led by Arif Ismail (MCM), comprising Gerardo Una (FAD); Marianne Bechara, Wouter Bossu, Carine Chartouni, Ke Chen, Ender Emre, Alessandro Gullo, Grace Jackson, Rose Nyongesa, Nadine Schwarz, Karla Vasquez-Suarez, and Christophe Waerzeggers (LEG); Parma Bains, Agnija Jekabsone, Tommaso Mancini-Griffoli, Fabiana Melo, Erica Sandoval, Nobu Sugimoto, and Jay Surti (MCM); Martin Cihak (SPR); and Itai Agur, Soledad Maria Martinez Peria, and German Villegas-Bauer (RES). Overall guidance was provided by Dong He and Marina Moretti (MCM); Ruud De Mooij (FAD); Yan Liu (LEG); Giovanni dell’Ariccia (RES); and Kenneth Kang (SPR).
Contents
INTRODUCTION
DEFINITIONS AND CLASSIFICATION OF THE CRYPTO ECOSYSTEM
PURPORTED BENEFITS AND POTENTIAL RISKS
A. Purported Benefits
B. Potential Risks
POLICY AND REGULATORY RESPONSES
A. Element 1. Safeguard Monetary Sovereignty and Stability by Strengthening Monetary Policy Frameworks and Do Not Grant Crypto Assets Official Currency or Legal Tender Status
B. Element 2. Guard Against Excessive Capital Flow Volatility and Maintain Effectiveness of Capital Flow Measures
C. Element 3. Analyze and Disclose Fiscal Risks and Adopt Unambiguous Tax Treatment of Crypto Assets
D. Element 4. Establish Legal Certainty of Crypto Assets and Address Legal Risks
E. Element 5. Develop and Enforce Prudential, Conduct, and Oversight Requirements to All Actors
F. Element 6. Establish a Joint Monitoring Framework Across Different Agencies and Authorities
G. Element 7. Establish International Collaborative Arrangements to Enhance Supervision and Enforcement of Crypto Asset Regulations
H. Element 8. Monitor the Impact of Crypto Assets on the International Monetary System I. Element 9. Strengthen Global Cooperation to Develop Digital Infrastructure and Alternative Solutions for Cross-Border Payments and Finance
CONCLUSION
ISSUES FOR DISCUSSION
BOXES
1. The Challenge of the Legal Classification of Crypto Assets
2. Do Crypto Assets Provide Cheaper Payments than Traditional Systems
3. The Rationale for Comprehensive Regulations
4. Potential Implementation Challenges
FIGURES
1. Crypto-asset Market Capitalization
2. 60-Day Moving Correlations of Changes of Prices of Bitcoin and Other Assets
3. Price of Bitcoin and Ethereum After FTX Collapse
4. Market Capitalization of Crypto Market
TABLE
1. Mapping Risks to Responses: Nine Elements of an Effective Crypto Policy Framework
ANNEXES
1. Classification of the Crypto Asset Ecosystem
2. Crypto Asset Standards and Guidance by Standard-Setting Bodies
3. The FTX Debacle: Strengthening the Case for Consistent and Comprehensive Regulation
References
