Global: IMF and FSB Issue Joint Policy Recommendations for Crypto Assets at G20 Request

The International Monetary Fund (IMF) and the Financial Stability Board (FSB) have jointly released a policy paper that includes recommendations for regulating activities related to crypto assets. This initiative was carried out at the request of the Indian G20 presidency, aiming to provide guidance and assist various jurisdictions in addressing the risks associated with crypto asset activities.

The policy paper addresses the regulation of stablecoins and decentralized finance (DeFi) activities. It serves as a consolidated set of recommendations, combining standards from both organizations. Importantly, it does not establish new policies or expectations for relevant authorities.

Stablecoins, designed to maintain a stable value, can unexpectedly become volatile, posing a significant risk to financial stability. The paper also scrutinizes DeFi protocols, arguing that despite differences in processes compared to traditional financial platforms, DeFi functions similarly in many aspects.

The report highlights that DeFi, while attempting to replicate certain functions of the traditional financial system, can also inherit its risks and vulnerabilities. These include liquidity and maturity mismatches, operational fragilities, interconnectedness, and leverage. The paper cautions that claims of decentralization in DeFi often do not withstand scrutiny, as some DeFi platforms exhibit unclear, opaque, untested, or manipulable governance frameworks that expose users to risks.

The policy paper reaffirms the IMF’s stance regarding a blanket ban on cryptocurrencies. The IMF has previously argued that banning cryptocurrencies may not be effective in the long run. Instead, authorities should focus on addressing the underlying drivers of crypto demand, such as consumers’ need for digital payment alternatives.

In summary, the IMF and FSB have collaborated to provide comprehensive policy recommendations to help jurisdictions navigate the challenges and risks associated with crypto assets, particularly in the areas of stablecoins and DeFi. These recommendations aim to foster a more informed and effective regulatory approach to the evolving crypto landscape.