IMF Officials Urge Developing Nations to Tighten Control of Crypto Flows

In a paper, the officials point out that crypto assets pose a challenge to capital flow management (CFM) regulations which are typically implemented mainly by developing economies to safeguard from the instability that can come from heavy financial flows.

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7 International Monetary Fund (IMF) officials are calling on governments to implement tighter control of crypto flows, which they argue, pose a challenge to regulations meant to protect economies from volatile financial flows.

In a paper, the officials point out that crypto assets pose a challenge to capital flow management (CFM) regulations which are typically implemented mainly by developing economies to safeguard from the instability that can come from heavy financial flows.

What Are CFMs

To put it simply, capital flow managements (CFMs) are measures that some governments put to restrict how much money can leave or enter the country.

As the IMF puts it, large and volatile flows can pose macro-economic and financial stability risks which can be magnified by gaps in a country’s financial and institutional infrastructure.

To mitigate such risks while retaining policy autonomy, many IMF member countries, particularly emerging market and developing economies with less-developed financial markets, maintain some form of restrictions on capital flow, hence Capital Flow Management.

With CFM regulations typically requiring that third -party financial institutions, such as banks, verify the nature of transactions and the identities of transacting parties, the officials are raising issue with cryptocurrencies because they can be held and traded on a peer-to-peer (P2P) basis without any third parties.

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SEE ALSO: Nigeria Crypto and Twitter Bans Came at a Cost to Millions of Young Nigerians, Says Latest UN Report

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Moreover, the officials raise the following issues about the nature of crypto that make them resistant to CFMs:

  • Even when these assets are traded and held through intermediaries such as exchanges and wallets, those intermediaries may not be regulated or obligated to comply with CFMs
  • No common and consistent naming system of crypto assets currently exists which leads to inconsistencies in regulations and gaps in regulatory coverage
  • Many crypto service providers operate across borders making supervision and enforcement by national authorities more difficult
  • Most crypto assets are traded pseudonymously and held without identification of the residency of the asset holder

According to the officials these situation poses legal and regulatory challenges when it comes to controlling financial flows. Besides, the officials point that:

“Crypto assets, especially stablecoins, may replace local currency as a medium of exchange, a store of value, or even a unit of account, particularly in countries plagued with high inflation and exchange rate volatility.”

– IMF

As such, the officials are saying, to preserve CFM’s effectiveness in an environment of growing crypto asset use, policymakers need a multi-faceted strategy.

Essential elements of such a strategy include:

  • Clarifying the legal status of crypto assets and ensuring that CFM laws and regulations cover them
  • Developing for persons and entities engaged in crypto activities and services a comprehensive, consistent, and coordinated regulatory framework and applying it effectively to CFMs
  • Establishing international collaborative arrangements for supervision of crypto assets
  • Addressing data gaps and leveraging technology (regtech and suptech) to create anomaly detection models and red-flag indicators that will allow for timely risk monitoring and CFM implementation

According to IMF:

“CBDCs could be designed to facilitate the implementation of CFMs while making cross-border payments more efficient; however, close collaboration between the issuing central bank and foreign central banks and other relevant authorities is crucial to realizing the potential efficiency gains of CBDCs while guarding against risks to the international monetary system.”

– IMF

CBDCs are also discussed as one way for governments to address the threat of crypto to such government regulations.

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RECOMMENDED READING: SEC Nigeria Unveils 3 License Requirements for Digital Assets Service Providers in the Country

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