Cryptocurrency Is the IMF an Adversary Evolution of IMF's Regulatory Approach to Cryptocurrency

In recent years, cryptocurrencies and their underlying blockchain technology have garnered widespread attention globally. They have not only posed challenges to traditional financial markets but have also presented regulatory dilemmas for governments and international organizations. The International Monetary Fund (IMF), as an authoritative institution in the global financial sector, has been closely monitoring the development of financial technology and its impact on the global financial system. The IMF's relationship with cryptocurrencies is intricate: on one hand, as a product of the Bretton Woods system, the IMF can "influence" the economic policies and even economic systems of recipient countries through conditional financial assistance. Some developing countries have at times felt "oppressed by the rulings of the International Monetary Fund and the doctrines of neoliberalism" and have attempted to "escape from the control of the IMF" by using cryptocurrencies as an alternative to their national currencies. On the other hand, cryptocurrencies can to some extent affect the economic stability of economically weaker developing countries, necessitating the establishment of robust regulatory systems. In this context, the IMF's stance on cryptocurrency regulation holds special significance and has gradually become a focal point of attention within and outside the industry. This article will take this as a starting point and review the evolution of the IMF's regulatory documents on cryptocurrencies, exploring the development of regulatory policies in the "post-crypto winter era."

1.Initial Attention and Assessment

In 2013, the IMF issued its first report on virtual currencies, delving into the concept, characteristics, potential risks, and regulatory issues surrounding virtual currencies. The report defined virtual currency as "a digital asset that uses encryption technology for security and operates through a peer-to-peer network." It further pointed out that virtual currencies do not rely on any central authority for issuance and regulation but are instead issued and verified through the consensus mechanism of computer networks. This decentralized nature gives virtual currencies features such as resistance to censorship, low costs, and high efficiency. The report analyzed the impact of virtual currencies on financial stability, monetary policy, financial innovation, among other aspects, and discussed the regulatory challenges associated with virtual currencies. Due to the widespread adoption and rapid development of virtual currencies, regulatory authorities needed to swiftly take measures to oversee this market. However, the cross-border and decentralized nature of virtual currencies made regulation challenging. Countries should formulate corresponding regulatory policies based on the characteristics and risks of virtual currencies. This includes regulating the issuance, trading, and storage of virtual currencies to prevent their use in illegal activities such as money laundering and terrorist financing. At the same time, the IMF also encouraged countries to consider the innovation and potential positive impacts of virtual currencies when formulating regulatory policies.

Subsequently, the IMF dedicated a chapter to cryptocurrencies in its Financial Stability Report for the first time, discussing the impact of cryptocurrencies on financial stability. The report noted that while the cryptocurrency market's size is relatively small, it could have an impact on financial stability, especially during times of financial market risk. Policymakers should pay attention to the risks in the cryptocurrency market and take appropriate policy and regulatory measures to ensure its stable development.

As cryptocurrencies continued to develop, the IMF released further reports in 2015, providing a deeper and broader exploration of the concept of digital currencies. The IMF defined digital currencies as "assets that exist in digital form and can serve as a means of payment and a store of value." Furthermore, the IMF categorized digital currencies into three types: Central Bank Digital Currencies (CBDCs), Stablecoins, and Other Crypto-Assets (OCAs). The report conducted a detailed analysis of the impact of these three types of digital currencies. Because cryptocurrencies are not issued by governments or central banks, they are not subject to the constraints of traditional monetary policy. The report pointed out that if cryptocurrencies were widely adopted, they could affect the measurement of money supply and the effectiveness of monetary policy implementation. Additionally, cryptocurrencies could have an impact on financial stability because they could be used for illegal activities such as money laundering and terrorist financing.

2.Focus on Cryptocurrency Innovation and Confidence

In this phase, the IMF issued multiple reports and articles that emphasized innovation in the field of cryptocurrencies. IMF Managing Director Kristalina Georgieva expressed great confidence in the development of cryptocurrencies, stating, "I believe that the adoption of digital currencies will be in line with the interests of financial institutions," and "if many existing financial institutions do not adopt these tools five years from now, I would be very surprised."

In 2016, the IMF published a paper on virtual currencies, providing an extensive analysis that differentiated virtual currencies from other digital currencies and, for the first time, pointed out that virtual currencies do not fit the legal concept of money. Because the legal concept of money is related to sovereignty, which defines the issuance of money and regulates the monetary system, the paper argued that virtual currencies, limited by price volatility, lack of legal tender status, and a lack of evidence to support them as an independent unit of account, cannot fulfill the functions associated with money. Furthermore, the paper distinguished between distributed ledger systems and centralized payment systems, indicating that distributed ledgers had the potential to fundamentally transform the financial sector by reducing costs and enhancing financial inclusion in the long term.

In 2017, the IMF released a report on the development of the financial technology industry, with a particular focus on the rapidly growing cross-border payment sector. The report made recommendations on how to effectively regulate distributed ledger technology and digital currencies that utilize this technology. It emphasized, "New technology may require jurisdictions to modify rules governing ownership, as well as rights and obligations under contracts." The report also suggested adopting stricter Know Your Customer (KYC) standards and regulatory requirements to prevent money laundering, tax evasion, and terrorist financing.

In 2018, the IMF published an article titled "Addressing the Dark Side of the Crypto World," which highlighted the need to first focus on policies that ensure financial integrity and consumer protection in the world of cryptocurrencies, similar to what has been done for the traditional financial sector. The IMF explicitly stated that due to the borderless nature of cryptocurrencies, no single country can address the challenges alone, and therefore, the regulatory framework must be global. Abandoning cryptocurrencies is unwise; instead, their potential should be embraced through collaborative efforts, utilizing technology for the common good while also recognizing the associated risks. The IMF aimed to play a role in this endeavor, leveraging its nearly universal membership and expertise in combating money laundering and terrorist financing to serve as a forum for finding answers in the evolving field of cryptocurrencies.

In 2019, the IMF released an article titled "The Rise of Digital Money," analyzing how cryptocurrency companies compete with large banks and credit card companies. The article acknowledged the advantages of digital currencies, such as convenience, universality, complementarity, low transaction costs, trust, and network effects, which could lead to their vibrant development. It also highlighted the potential for widespread adoption to lead to increased regulation and risks associated with digital currencies, including the potential for new monopolies, threats to weaker currencies, concerns about consumer protection and financial stability, and the risk of facilitating illegal activities. Cryptocurrencies are particularly attractive in countries with high inflation rates and weak institutions. The article also noted that when assets are supported by decentralized technology and stakeholders, virtual asset service providers (VASPs), such as cryptocurrency exchanges, find it challenging to comply with anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations spread across different jurisdictions. The article offered some solutions: to prevent monopolies and protect monetary policy, central banks can play a role by providing central reserve backing to stablecoin issuers and considering the issuance of their own digital currencies. Additionally, central banks can grant licenses under regulatory conditions and require VASPs to be responsible for customer screening, transaction monitoring, and reporting suspicious activities in line with KYC, AML, and CFT regulatory requirements, as well as establish industry standards for the security of cryptocurrency wallets and customer data.

3. Caution After the "Crypto Winter": Concretization and Globalization of Regulation

As the cryptocurrency industry endured a "crypto winter," the IMF adopted a more cautious stance. In 2021, the IMF released an article titled "The Rise of Public and Private Digital Money: A Strategy to Continue Serving the IMF's Mission," which acknowledged the advantages of digital currencies, such as speed, convenience, efficiency, and inclusiveness. Considering their far-reaching impact, policymakers need to accelerate their efforts. First, digital currencies must remain trustworthy, protecting consumers, ensuring security, operating within a sound legal framework, and supporting financial integrity. Second, domestic economies and financial stability must be protected through carefully designed public-private partnerships, a smooth transition to a role for banks, and fair competition. The design of digital currencies should also support climate sustainability and effective fiscal policies. Third, the international monetary system must remain stable and efficient, requiring the design, regulation, and provision of digital currencies to allow countries to maintain control over monetary policy, financial conditions, capital account openness, and exchange regimes. Payment systems should be increasingly integrated and applicable to all countries rather than fragmented, and a digital divide should be avoided. Finally, policy formulation must consider reserve currency allocation and support.

The IMF emphasized that low-income countries with underdeveloped digital capabilities and emerging market developing countries will need timely advice and capacity development assistance in macrocritical areas related to these countries. In this stage, the IMF will focus more on developing analytical frameworks, multilateral surveillance, and capacity development, with limited coverage in bilateral surveillance.

In the same year, the IMF stated in its Global Financial Stability Report that emerging markets and developing economies adopting cryptocurrencies and stablecoins could pose challenges to their macroeconomic and financial stability. Although risks were "currently under control," regulatory authorities needed to monitor and control cryptocurrencies. The areas at risk were tokens with "opaque issuance and distribution" and operational risks, including disruptions during extreme volatility.

In a series of reports, the IMF acknowledged that cryptocurrencies were no longer at the periphery of the financial system and noted that "given the relatively high volatility and interconnections of cryptocurrencies, their growing importance could soon pose risks to financial stability." Experts further called for the establishment of a coordinated global regulatory framework "to guide national regulation and supervision and mitigate the financial stability risks posed by the crypto ecosystem."

In January 2022, the IMF called on El Salvador to abandon its policy of adopting Bitcoin as legal tender and pressured Argentina in May by extending loans with conditions that restricted cryptocurrency trading. The IMF also warned the Marshall Islands, recognizing that making cryptocurrencies legal tender could "increase the risks to macroeconomic and financial stability and financial integrity." This series of cautious and pessimistic actions raised awareness that this multilateral organization serving around 190 countries might have a more nuanced view of cryptocurrencies. The President and Co-founder of ProChain Capital claimed, "I do believe that the IMF is an adversary to cryptocurrencies," as cryptocurrencies, being issued by non-state entities and borderless, "could be everywhere, greatly reducing the need for the United Nations financial institution, the IMF."

However, in the report "Regulating Cryptocurrencies" released in September, the IMF seemed to have no objections to the existence or even proliferation of non-governmental digital currencies. In fact, it called for the establishment of a "global regulatory framework" for cryptocurrencies to bring order to the market "and provide a safe space for continued useful innovation." IMF's concerns regarding countries like the Marshall Islands and El Salvador primarily revolved around their decision to continue using cryptocurrencies as legal tender despite having established their own unit of account currencies. These negative opinions were mainly centered on the macroeconomic impact of tethering fiscal carriages to cryptocurrencies. Institutionally, "IMF does indeed have a skeptical view of cryptocurrencies and came down hard on El Salvador," according to Josh Lipsky, Senior Fellow at the Atlantic Council's Geoeconomics Center, but this was because the organization was concerned about the financial vulnerability of the country's economy: if El Salvador failed to meet its international debt repayment obligations, the IMF "would have to bail them out."

Given that organizations like the IMF and the World Bank, broadly speaking, are missioned to support global financial stability and stimulate economic growth in developing countries, there might be a natural tension with decentralized currencies. Decentralized currencies tend to be unstable, uncontrollable financial tools without a clear address or identifiable responsible party. As scholars have pointed out, the IMF is often called upon to deal with economies plagued by "corrupt, incompetent leadership and phantom currencies," so it really "has no incentive to add another 'no issuer' currency." However, the IMF cannot ignore the reality that the future will be filled with cryptocurrencies.

In 2023, the IMF released a series of research reports, with TaxDAO having previously compiled the primary articles. In February, the IMF published "Key Policy Elements for Cryptocurrency Effectiveness," reaffirming the principle of "same activities, same risks, same regulations" and outlining a framework consisting of nine policy principles to address macrofinancial, legal and regulatory, and international coordination issues. In the April release of the "Global Financial Stability Report," following the collapse of cryptocurrency firms like FTX and the subsequent collapse of cryptocurrency-friendly banks in Silicon Valley, the IMF once again called for "comprehensive, consistent, and comprehensive regulation" and stressed "strict prudential requirements" on entities within the cryptocurrency ecosystem. In July, the IMF released a working paper on cryptocurrency taxation, noting that the current tax system lacks coherence, clarity, and effectiveness when it comes to cryptocurrencies because they were not considered when the system was constructed. Additionally, they need to do this in a context of ongoing rapid and complex innovation while balancing core objectives of tax efficiency, fairness, and revenue with the risk of stifling innovation. In September, the IMF, in collaboration with the Financial Stability Board (FSB), released a joint report on cryptocurrencies, outlining the risks that cryptocurrencies may pose to macroeconomic and financial stability and proposing a policy recommendation roadmap.

As the cryptocurrency industry gradually recovers, various countries are establishing regulatory policies for cryptocurrencies. The IMF, with its universal membership and organizational expertise, plays an important role in guiding countries in developing regulatory policies. However, balancing a cautious attitude and the ambitious goal of leading in the regulatory field in the face of disparities in economic development levels, regulatory attitudes, and capabilities among countries worldwide will be a test for the IMF.

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