Lagarde.- Crypto currencies bring advantages but also tulyp like bubble. Regulation is needed to avoid risks for financial stability

“Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto-assets that survive could have a significant impact on how we save, invest and pay our bills. That is why policymakers should keep an open mind and work toward ­­an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit,” said Christine Lagarde (Managing Director of the IMF) on her second blog post on crypto currencies, which was published today on IMF website.

Christine Lagarde (Managing Director at the International Monetary Fund). © IMF

But she also warns on the dark side of this new cyber money and points that “The dizzying gyrations of crypto-assets such as Bitcoin invite comparisons with the tulip mania that swept Holland in the 17th century and the recent dot-com bubble. With more than 1,600 crypto-assets in circulation, it seems inevitable that many will not survive the process of creative destruction.”

In Lagarde’s view, “the fintech revolution will not eliminate the need for trusted intermediaries, such as brokers and bankers. There is hope, however, that decentralized applications spurred by crypto-assets will lead to a diversification of the financial landscape, a better balance between centralized and de-centralized service providers, and a financial ecosystem that is more efficient and potentially more robust in resisting threats.”

Some benefits from crypto-assets

The Managing Director of the International Monetary Fund lists some benefits derived from these fasta nd inexpensive. Among them:

1.- Crypto-assets enable fast and inexpensive financial transactions, while offering some of the convenience of cash.- Some payment services now make overseas transfers in a matter of hours, not days. If privately issued crypto-assets remain risky and unstable, there may be demand for central banks to provide digital forms of money―an idea we explore in the forthcoming Global Financial Stability Report.

2.- The underlying technology of crypto-assets—distributed ledger technology, or DLT—could help financial markets function more efficiently.- Self-executing and self-enforcing “smart contracts” could eliminate the need for some intermediaries. Already, the Australian Securities Exchange has said it plans to use DLT to manage the clearing and settlement of equity transactions.

3.-Secure storage of important records is another promising use for DLT.- Healthcare companies are studying how to use the technology to maintain confidential medical data while providing access to insurers and other authorized users.

4.- In developing economies, such advances can help secure property rights, increase market confidence and promote investment.- In Ghana, where property ownership is often the subject of disputes, a DLT-based platform called Bitland promises to help solve the problem by securely recording land sales.

Crypto-assets do not pose an immediate danger for financial stability, but…

“…given their still-small footprint and limited links to the rest of the financial system, crypto-assets do not pose an immediate danger. Even so, regulators should remain vigilant: crypto-assets have the potential to magnify the risks of highly leveraged trading, and to increase the transmission of economic shocks should they become more integrated into mainstream financial products” Lagarde points.

And she continues: “Moreover, banks and other financial institutions will face challenges to their business models, should there be a large-scale shift away from government-issued currencies toward crypto-assets. Regulators might find it harder to ensure the stability of a more diffuse and decentralized financial system. Central banks might have more trouble acting as the lender of last resort in case of a crisis.”

International cooperation essential to manage the risks

“Before crypto-assets can transform financial activity in a meaningful and lasting way, they must earn the confidence and support of consumers and authorities. An important initial step will be to reach a consensus within the global regulatory community on the role crypto-assets should play. Because crypto-assets know no boundaries, international cooperation will be essential,” points the Managing Director of the IMF.

Thats why Christine Lagarde thinks that ” the IMF, with a membership of 189 countries, can play a key role by offering advice and serving as a forum for discussion and collaboration in the development of a consistent regulatory approach.”

Related external links:

Lagarde, for an even-handed approach to crypto-assets

Lagarde on the dark side of crypto currencies

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