A spike in cryptocurrency trading in emerging markets could imperil the global financial system, the International Monetary Fund warned Tuesday in a report on global financial stability. Meanwhile, the war in Ukraine is revealing the risks of crypto payment systems, the IMF found.
“Repercussions of the Russian invasion of Ukraine and ensuing sanctions continue to reverberate globally and will test the resilience of the financial system through various channels, including … acceleration of crypto nation in emerging markets, direct and indirect exposures of banks and nonbanks, and possible cyber-related events,” the international body said in the report.
The IMF highlights the increased use of cryptocurrencies in emerging markets since the start of the pandemic, noting that trading volumes of crypto assets against some emerging market currencies have spiked since the West sanctioned Russia.
Tether — the largest stable coin used to settle spot and derivative trades — has seen a spike in trading volumes against emerging market currencies. That spike is particularly notable in Turkey, where exchange rate volatility has been high, and the overall use of crypto assets has gained traction over the last few years.
Although a large part of the uptick stems from speculative investors, a shift towards using crypto as a means of payment could create challenges for policymakers, says the IMF.
The war in Ukraine has also shined the light on the risks of crypto payment systems, which by nature are decentralized. The lack of a centralized payment system makes it harder to track illicit activity for crypto and to enforce sanctions, especially as international payments have increased.
The IMF warns cryptocurrency exchanges that don’t comply with sanctions or properly monitor illegal activity could be used to circumvent sanctions. At the same time, they say, the technology crypto uses increases the secrecy of transactions, allowing dealings to be covered up more easily.
U.S. Treasury Secretary Janet Yellen told the House Financial Services Committee earlier this month that the U.S. is monitoring whether crypto is being used to evade sanctions, though she said the Treasury Department hasn’t seen that kind of activity yet.
“We are monitoring for any attempts to use crypto to evade our sanctions and we have ample enforcement authority which we won’t hesitate to use,” Yellen told the committee.
Over time, the IMF warns that sanctioned countries like Russia could leverage crypto mining — the process by which new digital tokens are created — to raise revenue for country coffers. Mining for cryptocurrencies like Bitcoin, which uses a lot of energy to mint, can allow countries to monetize their energy resources directly on blockchains and outside the financial system where the sanctions are implemented. The monthly average of all Bitcoin mining revenues last year was about $1.4 billion, 11% of which was captured by Russian miners, based on the IMF’s analysis of data from the Cambridge Bitcoin Electricity Consumption index.
How to guard against crypto risks?
To safeguard the financial system against risks from cryptocurrencies, the IMF recommends policymakers develop global standards for crypto assets, noting that stronger oversight of fintech firms and decentralized finance platforms is needed to mitigate their risks.
The international body recommends policymakers develop coordinated regulations for crypto assets to manage capital flows, create international collaboration, address data gaps, and leverage technology. Regulators should also create a Financial Action Task Force to enforce standards to guard against illicit capital flows, the IMF said.
The IMF’s recommendations come as the Biden administration studies how to regulate cryptocurrencies. As part of the administration’s approach, officials are speaking with international counterparts on crypto regulation. Lawmakers in both the House and Senate have also put forth proposals for regulating stablecoins, though none have gained traction yet.