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IMF Chief Christine Lagarde on What Comes Next for Crypto

The potential, the perils, the regulation and more...

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IMF Chief on the Dark Side of the Crypto Sorld

On March 13th, the IMF Chief, Christine Lagarde released a blog post titled “Addressing the Dark Side of the Crypto World” on the IMF blog. In her post, Lagarde expresses her thoughts on:

  1. The potential of crypto assets
  2. The perils of crypto assets
  3. The need for a regulatory framework
  4. The solution: Fighting fire with fire
  5. What comes next for crypto

The Potential

Lagarde does recognize the power of the technology behind crypto assets – blockchain. For the IMF chief, blockchain is an exciting advancement that could power financial inclusion by providing new, low-cost payment methods to those who lack bank accounts, and in the process empower millions in low-income countries.

The Perils

However, crypto assets are also “dangerous.” The decentralization and anonymity that comes with these crypto assets is what makes them “a potentially major new vehicle for money laundering and the financing of terrorism.” Moreover, the rapid growth of crypto-assets, the extreme volatility in their traded prices, and their ill-defined connections to the traditional financial world raises questions on the financial stability of the system.

The Need for Regulation

Lagarde cites the Financial Stability Board (FSB) and the Financial Action Task Force (FATF) as regulators that are looking into new rules and / or to serve as guidance to effectively deal with cryptocurrencies and other electronic assets. The IMF has also been working on stopping money laundering and combating terrorist financing for the last 20 years.

The Solution

As a solution, Lagarde proposes “fighting fire with fire,” implying that the same innovations that power crypto-assets, can be used to regulate them. And to begin with, regulators should use regulatory technology and supervisory technology as tools while focusing on policies that ensure financial integrity and protect consumers in the crypto world.

  • Distributed ledger technology (DLT) can be used to speed up information-sharing between market participants and regulators, and to create registries of standard, verified, customer information along with digital signatures.
  • Biometrics, artificial intelligence, and cryptography can be used to give law enforcement a leg up in acting quickly to stop illegal transactions.

To achieve the above, close international cooperation would be necessary.

What Comes Next for Crypto?

So, while market participants are busy debating over whether crypto assets are a bubble, just another fad, or a revolution equivalent to the advent of the Internet that will disrupt the financial sector and eventually replace fiat currencies…

The truth lies somewhere in between.

Lagarde, in her capacity as the Chairwoman of the IMF, believes that the potential of crypto-assets can be harnessed by working together, and leveraging the technology for the public good, while ensuring that they never become a haven for illegal activity or a source of financial vulnerability.

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