A surge in cryptocurrency trading in emerging markets could endanger 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.
“The repercussions of the Russian invasion of Ukraine and subsequent sanctions continue to reverberate around the world and will test the resilience of the financial system through various channels, including… the acceleration of cryptoization in emerging markets, direct exposures and indirect attacks from banks and non-banks and possible related cyberattacks. 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 soared since the West sanctioned Russia.
Tether, the largest stablecoin used to settle spot and derivatives trades, has seen an increase in trading volumes against emerging market currencies. That rise is particularly noticeable in Turkey, where exchange rate volatility has been high and the general use of crypto assets has gained traction in recent years.
Although a large part of the rally is coming from speculative investors, a shift towards using cryptocurrencies as a means of payment could create challenges for policymakers, the IMF says.
The war in Ukraine has also brought to light the risks of crypto payment systems, which are decentralized by nature. The lack of a centralized payment system makes it difficult to track illicit crypto activity and enforce sanctions, especially as international payments have increased.
The IMF warns that cryptocurrency exchanges that do not comply with sanctions or do not adequately monitor illegal activity could be used to circumvent sanctions. At the same time, they say, the technology using cryptography increases the secrecy of transactions, making it easier to cover up transactions.
US Treasury Secretary Janet Yellen told the House Financial Services Committee earlier this month that the US is monitoring whether cryptocurrencies are being used to evade sanctions, though she said the The Treasury Department has yet to see that kind of activity.
“We are monitoring any attempt to use crypto to evade our sanctions and we have broad enforcement authority that we will not hesitate to use,” Yellen told the committee.
Over time, the IMF warns that sanctioned countries like Russia could take advantage of crypto mining, the process by which new digital tokens are created, to increase revenue for the country’s coffers. Mining cryptocurrencies like Bitcoin, which uses a lot of energy for minting, can allow countries to monetize their energy resources directly on blockchains and outside of the financial system where sanctions are implemented. The monthly average of all Bitcoin mining revenue last year was roughly $1.4 billion, 11% of which was captured by Russian miners, according to IMF analysis of Cambridge Bitcoin Electricity Consumption Index data. .
How to protect yourself against crypto risks
To safeguard the financial system against cryptocurrency risks, the IMF recommends that lawmakers develop global standards for crypto assets, noting that stricter supervision of fintech companies and decentralized finance platforms is needed to mitigate their risks.
The international body recommends legislators to develop coordinated regulations for crypto assets to manage capital flows, create international collaboration, address data breaches and take advantage of technology. Regulators should also create a Financial Action Task Force to enforce standards to guard against illicit capital flows, the IMF said.
The IMF recommendations come as the Biden administration studies how to regulate cryptocurrencies. As part of the administration’s approach, officials are talking to their international counterparts about crypto regulation. Lawmakers in both the House and Senate have also put forward proposals to regulate stablecoins, though neither has gained traction yet.
Jennifer Schonberger covers crypto and politics for Yahoo Finance. follow her on @Jenniferisms.
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