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IMF offers five recommendations to manage risk in the crypto sector

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(Kitco News) - As global regulators increasingly turn their attention to cryptocurrencies, the IMF has released a paper providing five recommendations to help regulators manage risk in the crypto sector without stifling innovation.

The recommendations come in the wake of a disastrous year for the crypto market which saw the failure of prominent stablecoin TerraUSD, crypto-focused hedge funds including Three Arrows Capital, and major cryptocurrency exchanges like FTX.

The events of 2022 “raised serious concerns about market integrity and user protection,” the IMF said. “And with growing and deeper links with the core financial system, there could also be concerns about systemic risk and financial stability in the near future.”

According to the IMF, these concerns can be addressed through the development of global standards that give regulators a consistent set of rules to work from, and by bolstering financial regulation and supervision.

Crypto assets, including stablecoins, have yet to rise to the stature where they pose a major risk to the global financial system, and the IMF said they want to get standards established before they rise to that level.

“Some emerging market and developing economies are already materially affected,” the IMF said. “Therefore, we think it’s important for regulatory authorities to quickly manage risks from crypto, while not stifling innovation.”

The first recommendation from the IMF is that all crypto asset service providers should be licensed, registered and authorized. “That includes those providing storage, transfer, exchange, settlement, and custody services, with rules like those governing providers of services in the traditional financial sector.”

The IMF stressed the importance of all customer assets being clearly segregated from the assets owned by a crypto firm and “ring-fenced from other functions.”

Second, entities that carry out multiple functions should be subject to additional requirements that help them manage risk, such as “robust transparency and disclosure requirements so authorities can identify key dependencies.” Entities could potentially be prohibited from providing multiple functions if they generate conflicts of interest.

The third recommendation is that stablecoin issuers be subject to strict prudential requirements. “If not properly regulated, stablecoins could undermine monetary and financial stability,” the IMF said. “Depending on the model and size of the stablecoin arrangement, strong, bank-type regulation might be needed.”

The IMF is exploring a CBDC clearing and international settlements platform

Fourth, the IMF suggested there be clear requirements for how regulated financial institutions engage with crypto, with limits set on their level of exposure. “If they provide custody services, requirements should be clarified to address the risks arising from those functions.”

And fifth, the IMF called for the establishment of “robust, comprehensive, globally consistent crypto regulation and supervision.” They said the global nature of crypto means that regulators need to adopt a coordinated national approach that can adapt to a changing landscape and risk outlook.

The IMF concluded the paper by noting that containing user risks when it comes to crypto will be difficult due to the rapid evolution of the sector. The UN financial agency pledged that it will “continue to work with global bodies and member nations to help leading policymakers working on this topic to best serve individual users as well as the global financial system.”

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