2

CHAPTER

THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

Chapter 2 at a Glance
•• The crypto ecosystem continues its rapid growth, presenting both opportunities and challenges. This chapter
discusses the latest developments and financial stability challenges posed by the crypto ecosystem, with a
focus on emerging market and developing economies.
•• Crypto assets come in different flavors and have evolved to meet varying needs for speculative investment,
store of value, currency conversion, and payments. Decentralized finance (DeFi) is gaining momentum by
offering new services to users.
•• Financial stability risks are not yet systemic, but risks should be closely monitored given the global
implications and the inadequate operational and regulatory frameworks in most jurisdictions.
•• Challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto
asset providers, investor protection risks for crypto assets and DeFi, and inadequate reserves and disclosure
for some stablecoins.
•• In emerging markets, the advent of crypto assets has benefits but can accelerate cryptoization and circumvent
exchange and capital control restrictions. Increased trading of crypto assets in these economies could lead to
destabilizing capital flows.
•• Policymakers should implement global standards for crypto assets and enhance their ability to monitor the
crypto ecosystem by addressing data gaps. As the role of stablecoins grows, regulations should correspond to
the risks they pose and the economic functions they perform. Emerging markets faced with cryptoization risks
should strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies.

Introduction stability challenges. This chapter discusses the impli-

cations of the expansion of the crypto ecosystem and
The rapid growth of the crypto ecosystem pres-
provides an assessment of their associated financial
ents new opportunities. Technological innovation is
stability risks. For emerging market and developing
ushering in a new era that makes payments and other
economies, greater use of crypto assets presents some
financial services cheaper, faster, more accessible, and
benefits, but also macro-financial risks, especially with
allows them to flow across borders swiftly. Crypto asset
respect to asset and currency substitution—referred to
technologies have potential as a tool for faster and
in this chapter as cryptoization. The chapter concludes
cheaper cross-border payments. Bank deposits can be
with a set of eight actionable policy recommenda-
transformed to stablecoins that allow instant access to
tions. For readers less familiar with the terminology
a vast array of financial products from digital platforms
and developments, Online Annex 2.1 provides a brief
and allow instant currency conversion. Decentralized
description of the taxonomy of crypto assets as well
finance could become a platform for more innovative,
as a brief primer on the crypto ecosystem.2 The IMF
inclusive, and transparent financial services.
3

has discussed many critical issues relating to regulatory

Despite potential gains, the rapid growth and
frameworks with respect to crypto assets and digital
increasing adoption1 of crypto assets also pose financial
money. Some topics that are not covered in detail in
2

this chapter can be found in IMF (2020a) and IMF

The authors of this chapter are Parma Bains, Mohamed Diaby,
(2021) along with analysis of financial integrity issues,
1,

Dimitris Drakopoulos (co-lead), Julia Faltermeier, Federico Grinberg,

Evan Papageorgiou (co-lead), Dmitri Petrov, Patrick Schneider, and
Nobu Sugimoto. The chapter was written under the supervision of 2A stablecoin is a type of crypto asset that aims to maintain a
3,

Tobias Adrian, Fabio Natalucci, Dong He, and Aditya Narain. stable value relative to a specified asset or a pool of assets. Online
1“Adoption” refers to the degree of use of crypto assets by users for
2, Annex 2.1 offers more information on definitions. All online annexes
transferring and storing value. are available at www​.imf​.org/​en/​Publications/​GFSR.

International Monetary Fund | October 2021 41

GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

such as anti–money laundering and combating the A key component of the rise in market capitalization
financing of terrorism (AML/CFT) (IMF 2020a; IMF is increasing investor interest in stablecoins; newer
2020b); central bank digital currencies (CBDCs); technologies, such as Ethereum; other “smart contract”
and more (He and others 2016; Mancini-Griffoli and blockchains; and decentralized finance.
others 2018; IMF 2019). •• Stablecoins: Their market capitalization has quadru-
pled in 2021 to more than $120 billion (Figure 2.1,
panel 4). Tether is the largest stablecoin, but its market
Crypto Assets Continue to Grow through Ups share has declined sharply as major centralized crypto
and Downs exchanges have introduced their own versions (for
The market capitalization of crypto assets has grown example, USD Coin by Coinbase and Binance USD
significantly amid large bouts of price volatility. Through by Binance). Stablecoin trading volumes outpace
early May, the market capitalization almost tripled in those of all other crypto assets (Figure 2.1, panel 5)
2021 to an all-time high of $2.5 trillion (Figure 2.1, primarily because they are highly usable for settlement
panel 1). This was followed by a 40 percent fall in May of spot and derivatives trades on exchanges. The price
as concerns from institutional holders about the envi- stability for the top stablecoins continues to improve,
ronmental impact of crypto assets grew and global reg- as can be seen in the declining price deviations from
ulatory scrutiny of the crypto ecosystem escalated. The the targeted 1:1 peg with the dollar and other curren-
sharp declines during May were likely exacerbated by cies in 2021.4 Their relative price stability has shielded
5

high use of leverage (Figure 2.1, panel 2), which led to users from the volatility of other crypto assets, which
automatic liquidations3 of margin and futures positions
4 means they do not have to move their funds outside
by exchanges. Since then, the market value of crypto the crypto ecosystem.
assets has increased again to more than $2 trillion—a •• Ethereum and other “smart contract” blockchains:
170 percent increase year to date at the time of writing. Bitcoin remains the dominant crypto asset, but its
Despite significant price appreciation, the returns of market share has declined sharply in 2021 from
non-stablecoin crypto assets are less impressive when more than 70 percent to less than 45 percent.
adjusted for volatility. For example, the risk-adjusted Market interest has grown for newer blockchains
returns of Bitcoin over the past year are similar to the that use smart contracts and aim to solve the
performance of broader technology equities or the challenges of earlier blockchains by introducing
S&P 500 (Figure 2.1, panel 3). However, investors are features to ensure scalability, interoperability, and
exposed to larger drawdowns. The relative attractive- sustainability.5 The most prominent is Ether, which
6

ness of these crypto asset returns can be higher when surpassed Bitcoin trading volumes earlier in 2021
compared with other asset classes that also experience (Figure 2.1, panel 5).
large drawdowns, such as local currency bonds and •• Decentralized finance (DeFi): The size6 of DeFi 7

equities in some emerging market and developing grew from $15 billion at the end of 2020 to about
economies with weak fundamentals. Another argument $110 billion as of September 2021 (Figure 2.1,
often put forward in favor of non-stablecoin crypto panel 6) largely due to the rapid growth of
assets is their low correlation with other assets, offering (1) decentralized exchanges that allow users to
diversification benefits to investor portfolios (see the
April 2018 Global Financial Stability Report). Although 4The pricing dynamics of stablecoins have been examined in
this is true to some extent, the correlation between
5,

several studies (see discussion in Lyons and Viswanath-Natraj 2020)

these crypto assets and some key asset classes increased that generally identify stablecoins as safe havens during periods of
crypto asset turbulence.
significantly during recent episodes of market stress 5Scalability refers to the ability to handle large transaction vol-
(for example the COVID-19 sell-off in 2020). The
6,

umes. Interoperability is the ability to connect with other blockchains

diversification benefit could also decline over time if as well as off-chain data. Sustainability is the ability to scale in an
there is continued involvement of institutional holders environmentally sustainable way while retaining a robust gover-
nance structure.
that are affected by common factors. 6Size refers to the total value locked, or the total dollar value of
7,

all collateral deposited in DeFi platforms. The term “locked” is mis-

leading, given that this collateral can be removed quickly by users.
3Liquidations happen when investors do not meet margin require-
4, Moreover, collateral can be reused between platforms, inflating the
ments and exchanges automatically close the positions. overall total value locked.

42 International Monetary Fund | October 2021

 CHAPTER 2  THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

Figure 2.1. Crypto Ecosystem Market Developments

The market value of the ecosystem increased dramatically in 2021 and The April/May 2021 sell-off was accompanied by a sharp unwinding of
expanded beyond Bitcoin. leveraged positions from all-time highs.
1. Market Capitalization for Crypto Assets 2. Liquidations of Futures and Open Interest
(Billions of US dollars) (Billions of US dollars)
Stablecoins Liquidations of short positions
Bitcoin 40% Liquidations of long positions
2,500 Ether decline in 18 Open interest on Bitcoin/Ether futures, right scale 40
Smart contract excluding Ether May Tesla stops accepting 35
15
2,000 Other 3× year-to-date Bitcoin payments
Total 13 30
increase until China regulatory
1,500 10 25
early May crackdown
8 20
1,000 5 15
Automatic liquidations of
3 leveraged positions 10
500
0 5
0 –3 0
Jan. 2020 Apr. 20 July 20 Oct. 20 Jan. 21 Apr. 21 July 21 Dec. Jan. Feb. Mar. Apr. May June July Aug. Sep.
2020 21 21 21 21 21 21 21 21 21

Risk-adjusted returns of non-stablecoin crypto assets are comparable The market cap of stablecoins has quadrupled in 2021 while Tether’s
to other mainstream benchmarks. dominance has declined.
3. Risk-Adjusted Returns 4. Stablecoin Market Capitalization
(Sharpe ratio) (Billions of US dollars and percent share)
sUSD (crypto backed) Gemini USD
Past one year Past three years Huobi USD Pax Dollar
120 DAI (crypto backed) Binance USD 100
US tech USD coin Tether
US leveraged loans 100 90
S&P 500 80 80
Bitcoin
US real estate 60 Tether market share %, right scale 70
EM USD credit
EM equities 40 60
Crypto assets (top 10) 20 50
EM FX
0 40
–0.5 0.0 0.5 1.0 1.5 2.0 2.5 June Sep. Dec. Mar. June Sep. Dec. Mar. June Sep.
2019 19 19 20 20 20 20 21 21 21

Trading volumes of stablecoins, Ether, and other smart contracts rose The collateral “locked” in decentralized finance has risen sharply, led
rapidly in 2021. by decentralized exchanges and credit platforms.
5. Daily Trading Volumes on Exchanges 6. Total Value Locked in Decentralized Finance
(Billions of US dollars, 30-day rolling average) (Billions of US dollars)
200 140
Bitcoin Credit
175 Ether Decentralized exchanges 120
150 Smart contracts excluding Ether Other 100
125 Stablecoins
80
100
60
75
50 40
25 20
0 0
Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan. May Sep. June Sep. Dec. Mar. June Sep.
2018 18 18 19 19 19 20 20 20 21 21 21 2020 20 20 21 21 21

Sources: Bloomberg Finance L.P.; Bybt; CoinGecko; CryptoCompare; DeBank; and IMF staff calculations.
Note: Liquidation data are provided by Bybt. Post–April 27 liquidations are likely to be underestimated, given changes in Binance’s application programming interface
that stopped real-time data feeds. In panel 3, Sharpe ratios are calculated on a rolling 12-month basis and annualized. EM = emerging market; FX = foreign
exchange; USD = US dollar.

International Monetary Fund | October 2021 43

GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

trade crypto assets without an intermediary and to be growing faster among some nonbank
(2) credit platforms that match borrowers and institutions, most notably hedge funds,7 which 8

lenders without the need for a credit risk evalua- can lead to increased indirect exposures of the
tion of the customer (Figure 2.1, panel 6). These banking system.
services operate directly on blockchains (usually) •• The use of crypto assets for payments and settle-
without customer identification requirements. ments is still limited, with some exceptions (see
Most of DeFi is built on the Ethereum block- the “Cryptoization” section). This channel can
chain and uses Ethereum-based tokens, including accelerate rapidly, given that several global payment
stablecoins. DeFi is also one of the main drivers companies have only recently started to integrate
of the rapid growth of stablecoins and warrants with the crypto ecosystem, in particular with
close attention. Chainalysis (2021b) highlights stablecoins.
that DeFi users for now are primarily institutional Finally, new sources of risk are emerging, such as
players from advanced economies, whereas adop- stablecoins and DeFi, which did not exist on a large
tion among retail users and emerging market and scale in 2018. In the future, a widely used stablecoin
developing economies in general is lagging. or DeFi service with a reach and use across multiple
jurisdictions could scale up quickly and become
systemically important.
What Are the Financial Stability Implications of
Crypto Assets? Innovations that have given rise to the crypto
In October 2018 the Financial Stability Board ecosystem are significant and can create tangible
concluded that crypto assets did not pose a mate- benefits for countries, but the risks should be kept
rial risk to global financial stability (FSB 2018) in check. At a global level, financial stability risks
but identified several transmission channels that appear contained for now,8 but the macro-criticality
9

could change its assessment. These channels include of crypto assets, and in particular stablecoins, can be
risks from the size of market capitalization, inves- significantly higher for some emerging market and
tor confidence effects, risks arising from direct and developing economies where adoption has pro-
indirect exposures of financial institutions, and gressed fast. The next sections focus on the follow-
risks from the use of crypto assets for payments and ing issues (Table 2.1): (1) challenges from the crypto
settlements. ecosystem arising from operational risks, market
Since then, some of these channels have grown nota- integrity, data availability, and cross-border activ-
bly, and new sources of risk have emerged. ities; (2) stablecoin-specific issues linked to their
•• Market capitalization has grown by a factor design, use, and regulation and supervision at the
of 10 and is now comparable to some estab- domestic and global levels; and (3) macro-financial
lished asset classes (for example US high-yield stability issues such as cryptoization, which are
bonds). It is still small, however, compared with more prominent in emerging market and develop-
government bond and stock markets in major ing economies.
advanced economies.
•• Episodes of loss of confidence in crypto assets so far
have had limited spillovers to broader markets Challenges Posed by the Crypto Ecosystem
despite large fluctuations in crypto asset valua- The rapid growth of the ecosystem has been accom-
tions. Confidence effects from failures of crypto panied by the entrance of new entities, some of which
asset providers have also been limited so far.
However, their importance is rising as trading vol-
7These are some examples: Coinbase reported that 10 percent
umes in some countries’ exchanges have increased 8,

of the 100 largest hedge funds were using their platform as of

dramatically and, in some cases, are compara- 2021:Q2; a Goldman Sachs (2021) survey shows that 15 percent of
ble to the volumes of their respective domestic family offices have exposures to crypto assets, and close to half are
stock exchanges. potentially interested in initiating exposures.
8The April 2018 Global Financial Stability Report reached a
•• Exposures to crypto assets in the banking system are
9,

similar conclusion about the macro-criticality of crypto assets

growing, albeit from a low base. Exposures appear at that time.

44 International Monetary Fund | October 2021

 CHAPTER 2  THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

Table 2.1. Financial Stability Challenges

• Operational, cyber, and governance risks

• Integrity (market and AML/CFT)
Crypto Ecosystem
• Data availability/reliability
• Challenges from cross-border activities

• How stable are stablecoins?

Stablecoins
• Domestic and global regulatory and supervisory approaches

• Cryptoization, capital flows, and restrictions

Macro-Financial • Monetary policy transmission
• Bank disintermediation

Source: IMF staff.

Note: AML/CFT = anti–money laundering/combating the financing of terrorism.

have poor operational, cyber risk management, and its large reliance on a few entities (for example, Binance
governance frameworks.9 10 handles more than half of trading volumes, and Tether
•• Operational risks can result in significant downtime has issued more than half the supply of stablecoins).
when failures and disruptions prevent the use of services With limited or inadequate disclosure and over-
and even result in large losses of customer funds. Such sight, the crypto ecosystem is exposed to consumer
risks have coincided with periods of high transaction fraud and market integrity risks. Most crypto assets
activity and can result from poorly designed systems are highly volatile, speculative assets. One notable
and controls. For example, on May 19, when liquida- recent example was the increased investor interest in
tions of leveraged positions peaked, major exchanges “meme tokens” (Figure 2.2, panel 1). Some of these
reported outages, citing “network congestion.” tokens were created for speculation purposes, and their
•• Cyber risks include high-profile cases of price was highly influenced by social media trends.
hacking-related thefts of customer funds. Such Relatedly, investors are also likely to face losses from
attacks take place on centralized elements of the eco- tokens ceasing to exist—something that is less com-
system (for example, wallets and exchanges) but can mon in regulated securities markets. For example,
also arise on the consensus algorithms that underpin more than 16,000 tokens have been listed on various
the operation of blockchains. exchanges over time, but around 9,000 exist today.10 11

•• Governance risks involve the lack of transparency Risks can be further amplified by the use of leverage
around issuance and distribution of crypto assets offered in crypto exchanges, which has been as high as
and have resulted in investor losses. 125 times the initial investment. In response to such
risks, many jurisdictions have taken action or issued
So far, losses as a result of such risks have not had a sig- public warnings over the past few months, such as
nificant impact on financial stability, globally or domesti- the central banks of Argentina (BCRA 2021), Mexico
cally. However, as crypto assets grow, the macro-criticality (Banxico 2021), and Thailand (Thai SEC 2021), which
of such risks is likely to increase. In addition, the crypto prohibited exchanges from offering tokens with certain
ecosystem remains exposed to concentration risks, given characteristics; others imposed regulatory limits or
banned derivative products across several exchanges
(for example, Japan FSA 2021; UK FCA 2020).
9Some notable examples include hacking thefts in Japan
10,

DeFi products can expose users to even larger risks.

(Coincheck in 2018) and Singapore (KuCoin in 2019); the tem-
porary closure of the Philippines Digital Asset Exchange in 2021, Products can be more complex and less transparent,
reportedly due to large unfunded transactions; the outright collapse
of exchanges in Turkey in 2021 (Thodex, Vebitcoin), with claims
of billions in stolen assets; and the sudden price collapse and rapid 10This statistic is based on the number of tokens listed on
11,

outflows amid flawed collateral management at Bitmex in 2020. www​.CoinGecko​.com.

International Monetary Fund | October 2021 45

 GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

Figure 2.2. Crypto Ecosystem Challenges

Highly speculative investments, such as meme tokens, experienced Decentralized finance platforms have been offering attractive but
large volatility in 2021, even when compared with Bitcoin. volatile interest rates to users.
1. Market Capitalization and Realized Volatility 2. Borrowing Rates of USD Coin Stablecoin
(Billions of US dollars and percent) (Percent)
Meme tokens market cap
Volatility of Dogecoin (right scale) Compound Aave AaveV2
100 Volatility of Bitcoin (right scale) 1,050 70
900 60
80
750 50
60 600 40

40 450 30
300 20
20
150 10
0 0 0
Nov. Jan. Mar. May July Sep. May Aug. Nov. Feb. May Aug.
2020 21 21 21 21 21 2020 20 20 21 21 21

Data gaps can be significant when estimating on-chain activity. Crypto exchange trading activity occurs primarily through entities in
offshore financial centers.
3. Estimated Share of P2P Bitcoin Transactions, Based on Various Data 4. Trading Activity of Exchanges, by Registration
Providers (Percent share)
(Percent share) Offshore financial center Asia EU
1 2 3 4 5 6 7 North America Latin America EMEA
100 100

80 80

60 60

40 40

20 20

0 0
2016 17 18 19 20 Jan. Apr. July Oct. Jan. Apr. July
2020 20 20 20 21 21 21

Sources: CoinGecko; CryptoCompare; Debank; Financial Action Task Force; and IMF staff calculations.
Note: Panel 1 market capitalization is based on 10 meme tokens from CoinGecko. Panel 3 data come from the Financial Action Task Force (2021) report; the series
represent different data providers. The offshore financial center definitions follow IMF (2000). EMEA = Europe, Middle East, and Africa; EU = European Union;
P2P = peer to peer; USD = US dollar.

with large technological and governance risks arising hacking, such as the record $0.6 billion hack of Poly-
from faulty computer code. The lack of central interme- chain in August, and scams, such as rug pulls, in which
diaries complicates authorities’ efforts to monitor and developers abandon projects but keep investors’ funds.
regulate these products. As a result, many DeFi products The anonymity of crypto assets and limited global
contain risk disclosures that do not adequately warn standards create significant data gaps for regulators.
against their large and volatile returns11 (Figure 2.2, 12 Although authorities may be able to trace transactions
panel 2). In addition, DeFi has been the victim of that are executed on blockchains,12 they may not be13

able to identify the parties to a transaction. In addi-

11The volatility and lack of disclosure are more prominent in complex
12,
tion, the crypto ecosystem falls under varied regulatory
products, such as “liquidity mining” (which is offered by decentralized
exchanges and compensates users who provide liquidity to automated
market makers) and “yield farming” (which aims to optimize returns for 12One exception is “privacy tokens,” which also conceal transac-
13,

liquidity and collateral provision across DeFi services). tion data (for example, addresses, amounts).

46 International Monetary Fund | October 2021

 CHAPTER 2  THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

frameworks across countries, which results in little or financial centers (Figure 2.2, panel 4). In addition,
no monitoring and information sharing across jurisdic- many countries do not have conduct or prudential
tions. Despite some progress through the AML/CFT regulations in place that encompass the activities of
obligations for crypto asset providers set out by the crypto asset service providers. And even though some
Financial Action Task Force (FATF), their implementa- jurisdictions require some type of registration or
tion is still at an early stage (FATF 2021), with notable authorization process, the scope of such regulations in
delays in key areas such as the “travel rule.”13 14 many cases is limited to AML/CFT.
Monitoring the activity of crypto asset service The absence of effective supervision and regulatory
providers is complicated by limited, fragmented, and, frameworks can create regulatory arbitrage and curtail
in some cases, unreliable data. Public data sharing by enforcement. For example, users can access crypto
crypto asset providers is currently mostly voluntary assets through global crypto exchanges or wallets,
and lacking standardization. For example, while most even though these providers lack domestic banking
major crypto exchanges report their trading activity, relationships. The use of sovereign currencies on these
the information content varies widely, ranging from platforms can occur through third-party payment
minimal information to full real-time order books. In processing companies taking advantage of regula-
addition, given that data are self-reported, there are tory loopholes. Some jurisdictions, such as Malaysia,
incentives to manipulate the reporting of higher vol- Nigeria, and Turkey, recently imposed restrictions on
umes so as to rank higher on exchange rankings. payments and/or transactions through global exchanges,
Analyzing on-chain14 activity is also challenging,
15 such as Binance. However, such actions cannot prevent
given that data analysis techniques are at an early stage. on-chain transactions—for example, P2P transfers
On-chain data analytics companies have so far focused through online chat rooms or the use of decentralized
on detecting illicit activities, as opposed to providing exchanges (see the “Cryptoization” section).
reliable macro-relevant metrics regarding on-chain
activity. The FATF recently published a survey (FATF
2021) on the peer-to-peer (P2P) transactions of seven Issues Specific to Stablecoins
data companies in an attempt to detect the possibility The term “stablecoin” captures a very diverse set of
that illicit P2P transfers are growing, given that such crypto assets and can be misleading.15 While all aim to
16

transfers are not explicitly subject to FATF standards. anchor their value to a specific asset (typically the US
The survey shows large variation: one company esti- dollar) or a group of assets, stablecoins can be classified
mated that 80 percent of the dollar value of Bitcoin across a spectrum, depending on the type and credit
transactions in 2020 occurred without a crypto asset quality of their collateral backing as well as their price
provider, while another estimated it at only 3 percent stabilization mechanisms (see Figure 2.3, panel 1,
(Figure 2.2, panel 3). The data also show large uncer- for the collateral composition of the four largest
tainty regarding the illicit use of crypto assets, with no stablecoins):
clear indication whether activities are moving toward •• Cash-based: Fully backed by cash or liquid and safe
P2P transactions—making it difficult to ascertain the assets (such as bank deposits and US government
full degree of illicit crypto asset use. bills). These stablecoins are redeemable by the issuer
Crypto asset providers offer and market their at face value. Their reserves are normally maintained
services in many jurisdictions, which makes their by regulated entities, such as onshore US banks, and
regulation and supervision more challenging. They are they may also provide a higher level of transparency,
often headquartered in jurisdictions with favorable such as detailed disclosure of reserve assets and clear
regulatory, tax, and legal frameworks. For example, documentation of redemption rights, including full
most transactions on crypto exchanges take place segregation from other corporate assets.
through entities that operate primarily in offshore
15For example, the latest consultation of the Basel Committee on
13Under
14, the “travel rule,” crypto asset providers must obtain, hold, Banking Supervision (2021) proposes that the capital requirements
and exchange information about the originators and beneficiaries of for stablecoin exposures be based on a set of conditions that include
crypto asset transfers. (1) the regulatory and supervisory status of the entities performing
14On-chain transactions are recorded and verified on a blockchain.
15, key functions and (2) the effectiveness of the price stabilization
Off-chain transactions take place on a specific platform (for example, mechanism. The so-called stablecoins backed by other crypto assets
a crypto exchange) and not on the blockchain. and algorithms are not deemed to meet the stabilization condition.

International Monetary Fund | October 2021 47

 GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

Figure 2.3. Stablecoins

Stablecoins vary considerably with respect to their reserve An algorithmic stablecoin experienced a “bank run” in June as part of
composition. its collateral collapsed in value.
1. Reserves of Top Stablecoins 2. IRON Stablecoin and TITAN Price
(Percent and billions of US dollars) (US dollars, 2021)
$63 bn $27 bn $12 bn $6 bn
100 CB CP Pax Dollar 1.10 80
Other Other crypto assets IRON TITAN token (right scale)
SL Yankee CDs
CB WB 1.05 70
80
1.00 60

0.95 25 percent of collateral 50

60 CP involved native token
Ethereum
Cash/bank TITAN. The algorithm
Cash/bank 0.90 failed to stabilize 40
deposits/ deposits/
Treasury bills TITAN’s price and it
40 Treasury bills collapsed to 0.
0.85 30

0.80 20
20 Cash/bank
deposits/
Treasury bills USD coin 0.75 10

0 0.70 0
Tether USD Coin Binance USD DAI June 2 June 9 June 16 June 23 June 30

Sources: CoinGecko; and company websites.

Note: Panel 1 reserves data are as of June 2021 for Tether, August 2021 for USD Coin, July 2021 for Binance USD, and August 2021 for DAI. At the time, DAI
collateralization was more than 200 percent, while the other stablecoins had assets whose value was at least equal to their outstanding issuance. USD Coin
consolidates cash and cash equivalents in its disclosure (accounting for about 60 percent of reserves), with cash equivalents defined as securities with an original
maturity less than or equal to 90 days, in line with US generally accepted accounting principles. Circle announced that, as of September 2021, 100 percent of USD
Coin reserves would be moved to cash and cash equivalents. Binance USD is issued in collaboration with Paxos, with 4 percent of its reserves in Pax Dollar (USDP), a
separate native stablecoin of Paxos with under $1 billion in outstanding supply, itself secured by Treasury securities and Federal Deposit Insurance Corporation–
insured bank deposits. bn = billion; CB = corporate bonds; CDs = certificate of deposits; CP = commercial paper; SL = secured loans; USD = US dollar;
WB = wrapped bitcoin.

•• Asset-based: Fully backed by noncash equivalent assets The regulation of stablecoins varies substantially
(for example, corporate bonds, commercial paper, or across jurisdictions, inviting concerns about regulatory
commodities) and cash. These stablecoins are akin gaps, inconsistent regulatory treatment, and regula-
to money market funds prior to the reforms that fol- tory arbitrage.16 The following are three categories
17

lowed the global financial crisis. Issuers and exchanges of regulation:

may market these stablecoins as immediately redeem- •• Comprehensively regulated: Currently, no stablecoin
able at face value, but in some cases—especially arrangement fully meets this status.17 An example of
18

during periods of market stress—some issuers may be such a stablecoin would be one issued by a com-
able to defer redemption, offer in-kind redemption, mercial bank, subject to comprehensive prudential,
or impose higher redemption fees. conduct, and governance requirements.
•• Crypto-asset-based: Backed by other crypto assets. For •• Partially regulated by existing regimes: Elements of sta-
example, DAI is (over-) collateralized by a portfolio blecoin arrangements (for example, for reserve manag-
of crypto assets, such as Ether, Bitcoin, and USD ers) are regulated for conduct and prudential purposes
Coin. These stablecoins are usually structured on a or for limited purposes (for example, AML/CFT).
decentralized, noncustodial basis and are considered
part of DeFi. A further category comprises “algo- 16It is also worth noting that some widely adopted stablecoins can
17,

rithmic” stablecoins (also referred to as “noncol- also become a vehicle for money laundering and terrorism financing
lateralized”) that aim to maintain their peg using (FATF 2020).
17“Arrangement” refers to all functions behind the stablecoin,
algorithms that increase or decrease the supply of
18,

including its governance body, reserves manager, exchange selling it

tokens according to market conditions. to clients, and so on. See FSB (2020) for a full definition.

48 International Monetary Fund | October 2021

 CHAPTER 2  THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

Some stablecoin issuers, such as trust companies and country can also lead to cross-border spillovers if large
money transmitters, have been licensed and regulated global crypto exchanges are involved. The concentrated
by the existing regulatory frameworks in the United ownership of stablecoins by market makers could also
States. Regulators may be able to access information, trigger wider contagion.
but regulatory tools may be limited and unable to Run risks could also trigger a fire sale of commercial
address all the risks of stablecoin issuers. Furthermore, paper. In many jurisdictions, including the United
some exchanges and wallet providers that support sta- States, the liquidity of commercial paper is worse than
blecoins may fall only under AML/CFT requirements, that of other short-term assets, such as government
while some reserve managers and custodians may be bills, especially during periods of market stress (as seen
regulated entities. during the COVID-19 sell-off in 2020). The conta-
•• Nonregulated: No prudential or conduct regulation gion risk can be much higher where reserve assets are
of stablecoin arrangements. Many regulators are still concentrated in particular issuers or sectors. Although
in the process of developing applicable regulations, this risk might be Tether-specific for now, given its
as many stablecoins currently fall into this category. size and types of holdings, this kind of contagion risk
Some US dollar stablecoin issuers that have chosen could evolve for other stablecoins in the future.
to be headquartered offshore and operate through
offshore banks are nonregulated.
Cryptoization
Currently, many stablecoins suffer from poor disclo- Crypto adoption in some emerging market and
sure. Although stablecoin issuers are improving in this developing economies has outpaced that of advanced
regard, there is a need for substantial upgrades to meet economies. According to a recent survey, the top five
the same level of disclosure standards as commercial countries using or owning crypto assets in 2020 were
banks and money market funds. For example, Tether, emerging market and developing economies, whereas
the world’s largest stablecoin by market capitalization, the lowest adopters were generally advanced economies
has disclosed the composition of its reserve assets. (Statista 2021).18 Another recent survey (Finder 2021),
19

However, such disclosure is not yet audited by inde- with a more limited set of countries, also reaches similar
pendent accountants, and some important information conclusions, placing emerging market economies in
is still missing, including domicile, denomination of Asia among the top and advanced economies, such as
currencies, and sector of commercial paper holdings. the United Kingdom and the United States, among the
Moreover, the recent disclosure by Tether reveals bottom. Some emerging market country-specific surveys
a higher degree of liquidity mismatch than for other also show a large jump in adoption over the past year.19 20

major stablecoins. Even though Tether allows direct Beyond surveys, tracking country-specific adoption
and “immediate” 1:1 redemption for US dollars for can be challenging. So far, there is no reliable way to
a small fee, only one-third of its reserves are backed estimate the stock or flow of crypto assets based on
by cash and Treasury bills; about half is invested in country residency. A commonly used proxy is resi-
commercial paper. dency estimates based on internet visits to websites of
Some stablecoins can be subject to runs, with crypto asset providers. These confirm the survey data to
repercussions for the financial system. This could be show the popularity of several global crypto exchanges
driven by doubts about their redeemability at a 1:1 peg among emerging market and developing economies
due to the value of their reserves or the speed at which (Figure 2.4, panel 1), but they cannot measure the
reserves can be liquidated to meet potential redemp- actual use of crypto assets. Another metric is the size
tions. In June 2021 a small algorithmic stablecoin
(IRON) experienced a run (Figure 2.3, panel 2) as
18The Statista survey is based on a relatively limited sample of
one-quarter of its reserves were backed by another 19,

1,000–4,000 respondents a country among a group of 74 countries.

token (TITAN) whose market value went to zero. Even 19The Finder survey is based on 42,000 people across a sample
20,

if stablecoins are, for the time being, not large enough of 27 countries that excludes many emerging markets. Exam-
to be deemed “systemic,” there are financial stability ples include local surveys in Turkey (CoinTelegraph 2021) and
Indonesia (Tokenomy 2021), as well as estimates of volumes
implications for large banks in the event of fire sales of in crypto exchanges in Brazil (CoinDesk 2021) and Thailand
the assets that back stablecoins. An investor run in one (Bloomberg 2021).

International Monetary Fund | October 2021 49

 GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

Figure 2.4. Cryptoization Risks

EMDE residents are among the top visitors of major crypto exchange Volumes in local exchanges have grown rapidly and are comparable to
websites. some equity markets.
1. Geographic Breakdown of Internet Visitors 2. Volumes of EMDE Registered Crypto Exchanges
(Unique visitors, October 2020–June 2021) (Percent share of local equity exchange volumes)
100
Top United United Median
Turkey China Turkey Korea Russia Average
economy 1 States States
Taiwan Average of top three 80
Top United
Russia Ukraine Germany Korea Russia Province
economy 2 Kingdom of China
Economies

60
Top United
Vietnam Spain France China Turkey Germany
economy 3 Kingdom
Taiwan 40
Top United United United
Brazil Germany Province Ukraine
economy 4 States Kingdom of China States
Hong 20
Top The
Argentina Russia France Netherlands Kong Poland Brazil
economy 5 SAR
0
BINANCE HUOBI COINBASE KRAKEN FTX BITHUMB BITFINEX Jan. Apr. July Oct. Jan. Apr. July
Exchange 2020 20 20 20 21 21 21

The amount of value received on-chain has grown rapidly by some Off-chain trading volumes against some EMDE FX pairs have shown
estimates. large volatility in 2021.
3. Value Received On-Chain among 50 EMDEs 4. Volumes of EMDE FX on Crypto Exchanges
(Percent of GDP) (Share of interbank FX volumes)
500 Median 100
EM Asia
EM Europe Average
400 Latin America Top three average 80
MENA
300 SSA 60

200 40

100 20

0 0
Apr. 2020 July 20 Oct. 20 Jan. 21 Apr. 21 Jan. Apr. July Oct. Jan. Apr. July
2020 20 20 20 21 21 21

Demand and supply imbalances and capital flow management The migration of crypto mining can lead to higher electricity usage and
measures can lead to large market segmentation. on-chain revenues in EMDEs.
5. Bitcoin Premiums in Local Currency Markets 6. Bitcoin Mining Activity by Country
(Percent deviation since 2018) (Share of global hashrate)
China United States Russia Malaysia
Iran Kazakhstan Other
50 100
90% range
Latest
40 80
Maximum
30
60
20
40
10

0 20

–10 0
NGN KRW ARS ZAR PEN THB IDR RUB BRL UAH TRY MXN Sep. Dec. Mar. June Sep. Dec. Mar.
2019 19 20 20 20 20 21

Sources: Bloomberg Finance L.P.; Cambridge Centre of Alternative Finance; Chainalysis; Cryptocompare; Kaiko; Similarweb; and IMF staff calculations.
Note: Samples for panels 2 and 4 comprise 10 countries. Panel 3 is based on residency estimates from Chainalysis. In panel 5, the Bitcoin premium is calculated as
(Bitcoin/LCL × LCL/USD) / (Bitcoin/USD) − 1, in which LCL is the local currency on the x-axis. For Nigeria and Argentina, a parallel FX-rate estimate is used. Data
labels use International Organization for Standardization (ISO) currency codes. Hashrate measures the computing power used in crypto mining. EMDE = emerging
market and developing economy; FX = foreign exchange; MENA = Middle East and North Africa; SSA = sub-Saharan Africa; USD = US dollar.

50 International Monetary Fund | October 2021

 CHAPTER 2  THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

of trading volumes of crypto exchanges that operate Table 2.2. Pull and Push Factors Related to Crypto Adoption
only in specific countries rather than globally. Among
Potential Adoption Drivers for Emerging Market Users
a sample of such exchanges in emerging market and
developing economies, the reported traded volume in Pull Factors
2021 rose sharply and, in some cases, volumes have Returns from speculative investment
become comparable to the activity on the local stock Relative transaction costs and speed
Competitive financial products
exchange (Figure 2.4, panel 2).20 Finally, some block-
21

Reduced AML/CFT standards

chain analytics companies (for example Chainalysis Convenience of “on-chain” custody
2020; Chainalysis 2021a) attempt to infer the residency Push Factors
of on-chain crypto asset flows. Similar to surveys, Unsound domestic macro policies
their data show that adoption in emerging market and FX restrictions
developing economies is rising and has outpaced that in Vulnerable banking sector
Exclusion from other financial services
advanced economies, but the interpretation of the data
poses significant challenges (Figure 2.4, panel 3).21 22

Source: IMF staff.

There are several driving forces for cryptoization. Note: AML/CFT = anti–money laundering/combating the financing of terrorism;
Unsound macroeconomic policies combined with FX = foreign exchange.

inefficient payment systems in some emerging market

and developing economies boost crypto adoption. to bypass capital flow management measures; private
Some potential pull factors for crypto adoption, such wallets can act as a form of offshore bank account to
as speculative retail investing, may be common across store wealth.
countries (Table 2.2), but some of the recent drivers •• Inefficiencies in payment systems and limited access
are likely more specific to a subset of emerging market to financial services can also be a driver of dollar-
and developing economies. For example, ization. One prominent example of inefficiencies is
•• Weak central bank credibility and a vulnerable bank- the lack of interoperability among various domes-
ing system can trigger asset substitution as domestic tic payment systems, which can be a problem for
residents seek a safer store of value. Dollarization22 23
remittances as well as trade.24 Given the large share
25

pressures are a persistent risk for several emerging of unbanked people in some emerging market and
market and developing economies.23 The crypto 24
developing economies, remittances often take place
ecosystem can help domestic residents convert some through cumbersome cash-based methods, such as
of the headwinds of traditional dollarization—such those of post offices and other transfer operators.
as exchange rate restrictions and challenges in The payment rails of crypto assets can make some of
accessing and storing foreign assets—into tailwinds. these services faster and cheaper, especially through
For example, global crypto exchanges or other less the integration of stablecoins, which allow for a
secure methods, such as P2P transfers, can be used stable unit of account. Of course, such gains rely on
access to the internet and other technologies, which
are scarce in many countries.
20The presence of multiple exchanges quoting the same trading
21,

pairs could lead to double counting, as a buyer on one exchange can

be a seller on another. Macro-financial challenges depend critically on the
21For example, large volumes might result from on-chain transfers
22,

degree of adoption.
between wallets of crypto asset providers rather than increased use of •• A limited degree of adoption—for example,
crypto assets by retail users. In addition, residency-based estimates usu-
ally rely on web traffic data, which can be compromised by the use of small-scale use of crypto assets for remittances—will
technologies that mask online activity, hence reducing their accuracy. pose some of the challenges discussed earlier (see the
22Dollarization here refers to the de facto adoption of a foreign
23,

“Challenges Posed by the Crypto Ecosystem” sec-

currency (not necessarily the dollar) or asset that displaces the
domestic currency, driven by the preferences of the economy’s
tion) but will have a marginal impact on monetary
residents. The primary driver of the adoption can be a new means of policy or capital flows. Even when crypto payment
payment and unit of account (currency substitution) or a safer store rails are used, the underlying crypto assets will likely
of value (asset substitution).
23For example, among a sample of 65 emerging market and devel-
24,

oping economies that are not de jure dollarized, 2020 data showed 24See the discussion in IMF and BIS (2021) for some well-known
25,

that about one-third have foreign currency exceeding 30 percent of issues with international remittances. Chainalysis (2020) discusses
both total loans and deposits. the increasing use of crypto assets for remittances and trade.

International Monetary Fund | October 2021 51

GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

be held for only a short time (for example, the dura- over the 24/7 trading period of crypto asset mar-
tion of the remittance) before users exchange them kets. For markets to clear, some market makers must
for local currency to make purchases domestically. provide liquidity by trading more liquid pairs (such
•• More extensive degrees of adoption25—such as the adop-
26 as US dollar–Bitcoin and US dollar–local currency)
tion of stablecoins26 as means of payment and store
27 to determine the price of the less liquid pair (local
of value—can pose more significant challenges by currency–Bitcoin). This type of triangular arbitrage
reinforcing dollarization forces in the economy. Dol- is usually facilitated by institutional participants that
larization can impede central banks’ effective imple- have access to larger pools of liquidity in markets
mentation of monetary policy and lead to financial that do not include domestic retail participants (for
stability risks through currency mismatches on the bal- example, offshore funding markets). In periods when
ance sheets of banks, firms, and households. This can domestic demand for crypto assets rises substantially,
be further amplified by liquidity risks, as central banks these institutional participants can act as gateways for
are not able to provide liquidity backstops in foreign conversion of crypto asset demand to capital outflows
units of account (IMF 2020a). Cryptoization could through the exchange rate market. The recent sharp
moreover pose a threat to fiscal policy: crypto assets rise in trading volumes of crypto assets against some
can facilitate tax evasion, and seigniorage revenue may emerging market and developing economy currencies
also decline due to the shrinking role of central bank (Figure 2.4, panel 4) may have been the source of
money in the economy. spillovers in the exchange rate market that led to recent
restrictions imposed by authorities.
The adoption of a crypto asset as the main national Policy measures can be somewhat effective at
currency carries significant risks and is an inadvisable ring-fencing the impact of rising crypto asset demand
shortcut. Adrian and Weeks-Brown (2021) discuss in the foreign exchange market. Capital flow manage-
such risks to macro-financial stability, financial integ- ment measures and other crypto-asset-specific measures
rity, consumer protection, and the environment. For can have a notable impact in terms of creating market
now, the probability of such a scenario occurring due segmentation (see Makarov and Schoar 2020). For
to a choice of households and businesses is low for example, in Korea, Bitcoin purchases had premia as
most countries, given that the value of non-stablecoin high as 50 percent in 2018 due to strong domestic
crypto assets is too volatile and unrelated to the real demand and restrictions that kept arbitrage activities
economy to become the main unit of account. Such a at bay (Figure 2.4, panel 5).28 However, such restric-
29

scenario, however, could arise in countries with weak tions on crypto asset trading may trigger new leakages
monetary and exchange rate policies where the risks as trading moves away from exchanges and over to
associated with the use of volatile crypto assets is still a peer-to-peer29 and other less formal or less visible
30

relative improvement over existing policies. channels (such as chat rooms on the instant messaging
Increased demand for crypto assets could facili- system Telegram).
tate capital outflows that affect the foreign exchange A migration of “mining” activity to emerging mar-
market. Crypto exchanges play the crucial role of ket and developing economies can also have serious
facilitating the conversion of local currency to crypto implications for capital flows as well as for energy con-
assets and vice versa. The natural27 demand and28 sumption. Validating on-chain transactions for many
supply for conversions can easily become unbalanced crypto assets is done by so-called proof-of-work or
mining, whereby members of the network solve a com-
25A
26,challenge that is not covered in this chapter is the capacity of plex mathematical problem using computing power.
blockchains to process large amounts of payments in an economy, Following a crackdown on mining activity in China in
given their scalability problems; more recently, some newer technol-
ogies (such as layer 2 networks) have made it more feasible to solve early 2021, mining activity started to migrate to other
such problems. emerging market and developing economies and to the
26Compared with other volatile crypto assets, stablecoins are likely
27,

to be a more desirable store-of-value, given their link to a familiar

unit of account (usually the US dollar) and such features as anonym- 28Korea is classified as an advanced economy, but its relatively
29,

ity and access to DeFi. large crypto ecosystem offers meaningful lessons.
27For example, natural sellers can be recipients of remittances,
28,
29For example, Binance has increased its presence in P2P markets
30,

while buyers can be speculators that want to position for a in Africa, and other P2P platforms, such as Paxful, have seen a
rally in Bitcoin. notable increase in volumes there.

52 International Monetary Fund | October 2021

 CHAPTER 2  THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

United States (Figure 2.4, panel 6). This movement Table 2.3. Main Policy Recommendations
can have important implications for Standards, • National regulators should prioritize
Supervision, and the implementation of global standards
•• Energy consumption: Miners use electricity to power
Data applicable to crypto assets
their hardware. By some estimates, mining in the • Regulators need to control the risks
Bitcoin network consumes about 0.36 percent of the of crypto assets, especially in areas of
world’s electricity—comparable30 to the consump- systemic importance
• Coordination among national regulators
31

tion of Belgium or Chile. Large migration of mining is key for effective enforcement and less
activity can lead to a significant rise in domestic regulatory arbitrage
energy use, especially in countries that subsidize • Regulators should address data gaps and
monitor the crypto ecosystem for better
energy costs. However, future generations of Ethe- policy decisions
reum and other smart blockchains are expected to Stablecoins • Regulations should be proportionate to
consume much less energy than Bitcoin. the risk and in line with those of global
•• Capital flows: Miners are rewarded for their activities stablecoins
• Coordination is needed to implement
on-chain in the form of crypto assets. For example,
recommendations in areas of acute risk;
the value of mining revenues in 2021 has exceeded enhanced disclosure, independent audit of
$1 billion a month, on average, for each of the reserves, fit and proper rules for network
Bitcoin and Ethereum blockchains. Mining revenue administrators and issuers; and more

can potentially be used to circumvent capital flow Managing • Enact de-dollarization policies, including
Macro-financial enhancing monetary policy credibility;
restrictions as well as international financial sanc-
Risks a sound fiscal position; effective legal
tions, given that the main operating costs of miners and regulatory measures; and the
(for example, electricity) are normally paid domes- implementation of central bank digital
tically in local currency, but their revenues are paid currencies
• Capital flow restrictions need to be
on-chain in the form of crypto assets. reconsidered with respect to their
effectiveness, supervision, and enforcement
The banking sector can also come under pressure if Source: IMF staff compilation.
the crypto ecosystem becomes an alternative to domes-
tic bank deposits or even loans. Stronger competition
for bank deposits through stablecoins held on crypto financial integrity, consumer protection, and financial
exchanges or private wallets may push local banks stability. As a first step, regulators and supervisors need
toward less stable and more expensive funding sources to be able to monitor rapid developments and the risks
to maintain similar levels of loan growth. Beyond the they create. Depending on country circumstances, var-
direct loss in net interest income, a loss of customer ious forms of crypto assets may be adopted, and their
relationships and data on transactions would also economic functions may vary. Different countries have
undermine credit risk assessment for clients and their different policy priorities arising from the degree of
ability to offer targeted products to clients. crypto adoption and their existing vulnerabilities. For
example, the risks connected with adoption for trans-
Policies to Ensure Macro-Financial Stability action purposes differ from those arising from wide-
spread use as a store of value or a new unit of account.
Fintech innovation, including the crypto ecosystem, Risks to financial integrity are high from crypto assets
has the potential to improve fundamental aspects of operating on anonymous platforms, but they may be
the macroeconomy with better financial services and addressable for some stablecoins.
greater financial inclusion, especially in emerging mar- This chapter offers policy recommendations
ket and developing economies. Policymakers need to relating to three main areas: (1) regulation, super-
balance enabling financial innovation and reinforcing vision, and monitoring of the crypto ecosystem;
competition and the commitment to open, free, and (2) stablecoin-specific risks; and (3) managing the
contestable markets, on one hand, against challenges to macro-financial risks in emerging market and develop-
ing economies. Table 2.3 summarizes the policy advice
30For
31, a discussion of the merits of these types of comparisons of that builds on findings presented in this chapter and
energy usage, see https://​cbeci​.org/​cbeci/​comparisons. other IMF work (IMF 2019; IMF 2020a; IMF 2021).

International Monetary Fund | October 2021 53

GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

Standards, Supervision, and Data For example, because it is difficult to implement and
National regulators should prioritize the imple- enforce an adequate regulatory framework, some
mentation of complete global standards applicable to authorities have taken strong actions, such as ban-
crypto assets. Although standards applicable to crypto ning unregulated crypto asset activities. Although
assets are currently limited to AML/CFT (FATF) bans can have a direct impact on the business of
and proposals on the exposure of banks to crypto crypto exchanges, individuals are still likely to be able
assets (BCBS), other standards—such as those of to trade and exchange crypto assets by alternative
the International Organization of Securities Com- means. Therefore, jurisdictions should actively coor-
missions (IOSCO) and the Committee on Payments dinate with the relevant authorities and international
and Market Infrastructures’ Principles for Financial standard-setting bodies to maximize the effectiveness
Market Infrastructures (CPMI/PFMI)—provide a of their enforcement actions and minimize regula-
robust groundwork for regulation and supervision of tory arbitrage. Greater cross-border collaboration can
crypto assets.31 For example, standards regarding the enhance enforcement actions, but the resources needed
for such enforcement may present a greater challenge
32

powers and independence of supervisors, operational

resilience, disclosure, and governance have existed for for emerging market and developing economies.
some time, but still lack adequate implementation. If Swiftly tackling data gaps is central to inform policy
crypto exchanges deal with tokens that meet the defi- decisions. Greater data standardization can lead to better
nition of securities, those entities should be subject to oversight of new developments and a more accurate
existing international standards for securities inter- understanding of risks and can support proportionate
mediaries. All jurisdictions should implement such regulation of crypto asset markets. In that regard, an
standards. Globally, policymakers should prioritize international agreement on common minimum princi-
making cross-border payments faster, cheaper, more ples for data should be developed. A globally consistent
transparent and inclusive through the G20 Cross taxonomy can help data standardization and coopera-
Border Payments Roadmap (G20 2020). The IMF tion. There is also scope for international coordination
can support such efforts through Financial Sector on compilation and sharing of data sources from private
Assessment Programs and technical assistance. companies for regulatory and public policy purposes.
Robust and globally consistent standards are needed
to mitigate financial stability risks. Where standards Stablecoins
have not yet been developed, regulators need to use
existing tools to control risk and implement a flexible Stablecoins require regulations proportionate to
framework for crypto assets. The growing systemic their risk and the economic functions they serve,
implications of crypto assets may indeed warrant taking into account recommendations put forward by
immediate regulatory action in some countries. Reg- the Financial Stability Board, which recently finalized
ulators must use existing measures and international 10 high-level recommendations comprehensively cov-
standards by focusing on areas of acute risk, such as ering requirements—such as governance, risk manage-
wallets, exchanges, and financial institutions’ exposures. ment, transparency, and redemption rights—with the
Authorities should ensure that the regulatory frame- underlying principle of “same business, same risk, same
work is flexible enough to be adjusted in the future, in rules.” As a matter of priority, authorities should ensure
line with forthcoming international standards. Interim that widely used stablecoins have effective risk manage-
measures should be taken, including clear consumer ment frameworks with regard to credit and liquidity
warnings and investor education programs, especially risks as well as operational, AML/CFT, and cyber risks,
where crypto adoption has been fast, such as in some among others. Regulation and supervision of stable-
emerging market and developing economies. coins could be enhanced through cooperation agree-
National regulators should enhance cross-border ments between country authorities that consider the
coordination of supervision and enforcement actions. various types of risks stablecoins pose for each country.
Certain US dollar–linked stablecoins seek to base their
31The IMF has previously highlighted the relevance of existing
operations in chartered banks in the United States.
Meeting banking license requirements would resolve
32,

underlying principles of financial regulation that are applicable to

crypto assets (see Cuervo, Morozova, and Sugimoto 2020). many regulatory challenges.

54 International Monetary Fund | October 2021

 CHAPTER 2  THE CRYPTO ECOSYSTEM AND FINANCIAL STABILITY CHALLENGES

There are areas of acute risk in stablecoin arrange- fend off dollarization will need to strengthen monetary
ments that require more immediate attention. Various policy credibility, safeguard the independence of central
functions, including reserves management, network banks, and maintain a sound fiscal position along with
administration and governance, custody, and exchange effective legal and regulatory measures to disincentivize
services, can generate risks to consumer protection, foreign currency use. Similarly, although simply issuing
financial stability, market and financial integrity, and central bank digital currencies does not automatically
operational and cyber resilience. Authorities should change the incentives to hold foreign currencies, central
consider measures—such as enhanced disclosure bank digital currencies may help reduce dollarization if
requirements, independent audit of reserves, fit and they help satisfy a need for better payment technologies.
proper rules for network administrators and issuers, A number of countries have launched similar projects to
and rules around enhanced operational and cyber modernize their payment systems, taking advantage of
resilience—to reflect the increased reliance on digi- the latest developments in digital technology and using
tal platforms and various types of distributed ledger the domestic currency for instant payments.
technology. Where stablecoins generate systemic risk, The design of capital flow restrictions in a digital
their regulatory obligations should reflect this position, world needs to be reconsidered, including via stable-
with rules aligned with traditional entities that provide coin regulations. Applying established regulatory tools
similar products (for example, bank deposits, digital to manage capital flows may be more challenging when
payments, money market funds, and so on). value is transmitted on new platforms that are not
bound by existing capital flow management mea-
sures (IMF 2021). Because of the way private entities
Managing Macro-Financial Risks organize or relocate their activities, the effectiveness
Reversing or averting dollarization requires strong of regulation, supervision, oversight, and enforcement
macroeconomic policies, but these may not by them- of capital flow management measures faces challenges
selves be enough. Crypto assets on their own do not at jurisdictional levels. Therefore, there is a need for
change the economic forces that lead to the inter- cross-border collaboration and cooperation to address
national use of currencies or increased dollarization. the technological, legal, regulatory, and supervisory
Yet the technological advance of the crypto ecosystem, challenges (IMF 2021; IMF and BIS 2021). In partic-
and especially stablecoins, could reinforce the incen- ular, the host authorities where stablecoins are more
tives behind currency and asset substitution and ease widely used should be encouraged to establish a close
adoption. Hence, the tolerance for policy missteps is coordination mechanism with the home regulator
greatly reduced (IMF 2020a). Countries that want to where stablecoin reserves are managed.

International Monetary Fund | October 2021 55

GLOBAL FINANCIAL STABILITY REPORT: COVID-19, CRYPTO, AND CLIMATE: NAVIGATING CHALLENGING TRANSITIONS

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