The International Monetary Fund (IMF) has issued a working paper for assessing vulnerabilities in the crypto space.
In the study “Assessing Macrofinancial Risks from Crypto Assets,” the lender emphasizes creating a Crypto Risk Assessment Matrix (C-RAM) to aid governments in identifying risk factors in the crypto industry. The C-RAM will then help define regulatory measures in response to the identified risks.
Surprisingly, the IMF makes no mention of non-fungible tokens (NFTs) in the working paper.
The C-RAM matrix is a three-step approach. First, a decision tree is designed to evaluate the cryptocurrencies’ impact on the macro-economy of any country under review. The matrix then searches for indicators for monitoring traditional financial markets. The final step determines global macro-financial risks that could impact a country’s risk profile.
Because risks may concentrate on certain players, such as stablecoin issuers, the research suggests broadening macroprudential instruments to address crypto-specific issues. This includes capital buffers, liquidity limits, and the designation of select banks as systemically significant. Other recommendations included specialized oversight bodies, updated models, and creative policy responses, such as for cyber threats.
The authors utilized El Salvador as a case study to demonstrate the use of C-RAM. This country made headlines in September 2021 when it declared Bitcoin (BTC) as legal tender. El Salvador’s adoption of Bitcoin, according to the IMF study, raises risks to the market, overall economic liquidity, and regulations.
Overall, the IMF study says crypto assets are similar to risky asset classes in terms of their proclivity for mispricing and shock transmission. However, its distinguishing qualities, such as automation and decentralization, bring new regulatory complications. Crypto assets may impair monetary policy transmission, facilitate volatile cross-border capital flows, and be subject to data gaps, the paper added.
To address such issues, the working paper suggests broadening macroprudential policy instruments to address crypto-specific risks. It advocates for international cooperation to address data constraints that impede effective oversight. The report contends that crypto assets should be included in systemic risk assessments that are tailored to each country’s weak spots.
