Still not a fan: IMF finds digital coins pose ‘considerable challenges’ to world market

Without denying that cryptocurrency has the ability to alleviate global payments, digital coins still pose considerable challenges to the world market, warned the International Monetary Fund in a new report published Tuesday.

Their Global Financial Stability Report states that while risks related to digital asset trading on exchanges appear ‘contained for now,’ continuous monitoring is still in order.

Risk will grow with adoption

Risk and economic impact in general will increase parallel to growing adoption of crypto, the IMF writes. They stress the need for more oversight, emphasizing the fact that crypto regulation is inadequate and its operating structure shows deficiencies. The international body’s report states:

Challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto asset providers, investor protection risks for crypto assets and DeFi [decentralized finance], and inadequate reserves and disclosure for some stablecoins.

Concerns over capital destabilization

The IMF warns use of stablecoin and cryptocurrency enables crimes like tax evasion. They find increased trading of crypto in El Salvador and other emerging markets might result in destabilizing capital flows. Stablecoin risk is linked to fire sale of commercial paper.

Tether, the stablecoin with the highest market cap, holds such paper worth almost $70 billion. According to the authority, a run on Tether can lead to a run on commercial paper. Such risk is not excluded for other stablecoins in the future.

The IMF also warns about leverage risk. Some crypto brokers offer leverage of as much as 125 times the initial deposit.

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Stablecoin market cap quadrupled this year

In 2021, the market cap of stablecoins passed $120 billion. Stablecoin trading volumes outpace those of other crypto assets. This is because traders use stablecoins to settle spot and derivative trades.

IMF bemoans lack of transparency  

According to the IMF, the majority of stablecoins doesn’t offer transparent disclosure of backing. They believe the composition of backed assets disclosed by Tether has not been the subject of an independent audit. Moreover, the sector of commercial paper holdings, currency denomination, domicile, and other important information is still missing.

U.S. authorities to officially propose stablecoin regulation this month

Later this month, U.S. authorities will present a stablecoin regulation proposal. They are expected to recommend making transparency of backing a requirement.

Pressure on traditional finance

The IMF also warned about pressure facing the banking sector in case crypto becomes an alternative to deposits or loans from banks.