The International Monetary Fund (IMF) last week warned that crypto assets could create a new financial system, to which the crypto industry responded with a resounding “Exactly.”
In a September 29 working paper titled “Assessing Macrofinancial Risks from Crypto Assets,” the IMF discusses the potential systemic risks associated with the increasing prominence of cryptocurrencies and offers a framework for understanding and tracking these risks.
Risk Assessment Matrix
The paper introduces a country-level Crypto-Risk Assessment Matrix (C-RAM) to summarize key vulnerabilities, indicators, potential triggers, and policy responses relevant to the crypto sector.
This matrix aims to help policymakers and experts better identify and navigate the risks presented by cryptocurrencies and create relevant strategies to contain and manage those risks.
Fraud and Cybersecurity
Major areas of concern include structural vulnerabilities in the crypto ecosystem, contagion risks between traditional finance and crypto, operational risks, regulatory arbitrage, limited transparency, and data availability.
The inherent susceptibility of the crypto industry to fraud, cybersecurity threats, and technology risks exposes it to various external threats, the IMF said.
Liquidity risks, market integrity risks, and legal and consumer protection risks also pose significant challenges for the crypto industry, the IMF said.
Participants relying on a secured, transparent record for clearing, and settlement of financial transactions provided by distributed ledger technology mitigates some of the risks observed, but introduces regulatory challenges, the IMF said.
What the Crypto Industry Sees as Opportunity
What the IMF views as potential risks to assess, is what the cryptocurrency advocates argue will make for a more efficient and accessible financial system.
The crypto industry has long argued that its decentralized nature and its reliance on blockchain technology make it more secure and transparent than the traditional financial system.
Crypto advocates also argue that cryptocurrencies can help to reduce financial inclusion and make financial services more accessible to people in developing countries.
The IMF’s warning about the potential risks posed by cryptocurrencies is a reminder that the industry is still in its early stages of development and that there are a number of challenges that need to be addressed before it can be widely adopted.
However, the crypto industry’s response to the IMF’s warning is also a sign of the industry’s confidence in its own potential to revolutionize the financial system.
It remains to be seen whether cryptocurrencies will ultimately create a new financial system, but the industry is certainly moving in that direction.