Elements of Effective Policies for Crypto Assets; Policy Paper No

IMF POLICY PAPER

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO

ASSETS

IMF staff regularly produces papers proposing new IMF policies, exploring options for

reform, or reviewing existing IMF policies and operations. The following documents have

been released and are included in this package:

• A P

ress Release summarizing the views of the Executive Board as expressed during its

February 8, 2023 consideration of the staff report.

• The Staff Report, prepared by IMF staff and completed on January 4, 2023 for the

Executive Board’s consideration on February 8, 2023.

The IMF’s transparency policy allows for the deletion of market-sensitive information and

premature disclosure of the authorities’ policy intentions in published staff reports and

other documents.

lectronic copies of IMF Policy Papers

are available to the public from

http://www.imf.org/external/pp/ppindex.aspx

International Monetary Fund

Washington, D.C.

February 2023

PR23/51

Press Release – IMF Executive Board Discusses Elements of

Effective Policies for Crypto Assets

FOR IMMEDIATE RELEASE

Washington, DC – February 2, 2023: On February 8, 2023 the Executive Board of the

International Monetary Fund (IMF) discussed a board paper on

Elements of Effective Policies

for Crypto Assets that provides guidance to IMF member countries on key elements of an

appropriate policy response to crypto assets. The paper’s objectives are in line with the IMF’s

mandate to support economic and financial stability across its membership. The paper

addresses questions raised by IMF member countries on benefits and risks of crypto assets

and on how to structure appropriate policy responses. It operationalizes the principles outlined

in the Bali Fintech Agenda (IMF and World Bank 2018) and includes macrofinancial

considerations such as implications for monetary and fiscal policies. The proposed principles

are fully aligned with the relevant standards of the Financial Stability Board and other standard

setting bodies.

Efforts to put in place effective policies for crypto assets have become a key policy priority for

authorities, amid the failure of various exchanges and other actors within the crypto

ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as

crypto assets may continue to evolve despite the current downturn.

The paper sets forth a framework of nine elements that can help members develop a

comprehensive, consistent, and coordinated policy response. The nine elements—or policy

actions—are:

1. Safeguard monetary sovereignty and stability by strengthening monetary policy

frameworks and do not grant crypto assets official currency or legal tender status.

2. Guard against excessive capital flow volatility and maintain effectiveness of capital flow

management measures.

3. Analyze and disclose fiscal risks and adopt unambiguous tax treatment of crypto assets.

4. Establish legal certainty of crypto assets and address legal risks.

5. Develop and enforce prudential, conduct, and oversight requirements to all crypto market

actors.

6. Establish a joint monitoring framework across different domestic agencies and

authorities.

7. Establish international collaborative arrangements to enhance supervision and

enforcement of crypto asset regulations.

8. Monitor the impact of crypto assets on the stability of the international monetary system.

9. Strengthen global cooperation to develop digital infrastructures and alternative solutions

for cross-border payments and finance.

By adopting the framework, policy makers can better mitigate the risks posed by crypto assets

while also harnessing the potential benefits of the technological innovation associated with it.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss the board paper on elements of

effective policies for crypto assets. They noted the timeliness and importance of the paper, as

well as its relevance to the IMF’s wide and diverse membership, and generally underscored

the need for a comprehensive framework. They considered that the growing adoption of crypto

assets in some countries, the extra-territorial nature of crypto assets and its providers, as well

as the increasing interlinkages with the financial system, motivate the need for a

comprehensive, consistent, and coordinated response.

Directors generally observed that while the supposed potential benefits from crypto assets

have yet to materialize, significant risks have emerged. These include macroeconomic risks,

which encompass risks to the effectiveness of monetary policy, capital flow volatility, and fiscal

risks. They also noted serious concerns about financial stability, financial integrity, legal risks,

consumer protection, and market integrity. Against this backdrop, Directors broadly welcomed

the proposed framework and its elements.

Directors agreed that crypto assets have implications for policies that lie at the core of the

Fund’s mandate. In particular, the widespread adoption of crypto assets could undermine the

effectiveness of monetary policy, circumvent capital flow management measures, and

exacerbate fiscal risks. Widespread adoption could also have significant implications for the

international monetary system in the longer term. Directors, therefore, emphasized that robust

macroeconomic policies, including credible institutions and monetary policy frameworks are

first-order requirements and that Fund advice in these areas will remain crucial. Directors

generally agreed that crypto assets should not be granted official currency or legal tender

status in order to safeguard monetary sovereignty and stability. Fiscal risks posed by crypto

assets including contingent liabilities to the government should be fully disclosed as part of

countries’ fiscal risk statement, and the applicability of tax regimes should be clarified.

Directors broadly agreed on the need to develop and apply comprehensive regulations,

including prudential and conduct regulation to crypto assets, and effective implementation of

the FATF standards on AML/CFT. They noted that the Fund should work closely to support

the regulatory work under the leadership and guidance of standard-setting bodies. In this

context, Directors emphasized the importance of fully aligning the framework with the

initiatives and standards set by the standard-setters. Directors agreed that strict bans are not

the first-best option, but that targeted restrictions could apply, depending on domestic policy

objectives and where authorities face capacity constraints. A few Directors, however, thought

that outright bans should not be ruled out. Directors noted that regulation should be mindful

not to stifle innovation, and the public sector could leverage some of the underlying

technologies of crypto assets for their public policy objectives.

Directors emphasized the importance of prioritizing elements of the framework where

countries face implementation challenges, including weak regulatory institutions. They

stressed that the pace and sequencing of implementation should be tailored to countries’

respective circumstances. It will be important to underpin the regulatory treatment with clear

and sound private and public law frameworks. Strong coordination between authorities, both

at the domestic and international levels, is critical for consistent implementation and avoiding

regulatory arbitrage. Directors also highlighted the importance of promoting the principle of

“same activity, same risk, same regulation.”

Directors agreed that the framework should be used to guide staff’s policy dialogue with

country authorities and capacity development activities, as well as participation in discussions

with standard-setting organizations. They underscored the need to focus on the Fund’s

comparative advantage and on macrofinancial implications. They also saw a role for the Fund

in serving as a bridge between the experience of its membership and the international

standard- and rule-setting process, including disseminating best practices. Directors

underscored the importance of tailored advice and close dialogue with authorities, given the

different stages of development of crypto assets and different capacities among member

countries. Fund capacity development support will be crucial.

Directors stressed the importance of addressing the significant data gaps and emphasized the

role of the Fund in monitoring risks and impacts on the international monetary system. They

welcomed in this context the new G20 Data Gaps Initiative. Consistent recording of crypto

assets in macroeconomic statistics across economies, underpinned by a reliable data

framework, will be important.

Looking ahead, Directors emphasized that the Fund could serve as a thought leader in further

analytical work on rapidly evolving developments in crypto assets. They underscored the

importance of promoting ongoing knowledge sharing and lessons from practical

implementation issues in the field. Fund work on crypto assets is expected to remain within

the agreed budget augmentation framework.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

EXECUTIVE SUMMARY

Crypto assets have existed for more than a decade, but efforts to put in place effective

public policies toward them have moved to the top of the global policy agenda only

recently. This is partly because crypto assets, after years of being niche products, are

now being held and in some instances used more widely. The growth in their market

capitalization has been volatile, and their interconnectedness with the financial sector

has increased. Amid the decline in crypto asset valuations, the failure of various

exchanges (such as FTX) and other actors within the crypto ecosystem, as well as the

collapse of certain crypto assets (like Terra USD), have intensified the need for effective

policies toward these assets.

This paper aims to address questions by Fund members on how to respond to the rise

of crypto assets and the associated risks. To frame the discussion, the paper defines and

classifies crypto assets based on their underlying features and describes their purported

benefits and potential risks. The paper presents a policy framework for crypto assets

that aims to achieve key policy objectives such as macroeconomic stability, financial

stability, consumer protection, and market and financial integrity. The framework

outlines key elements that are necessary to ensure that these objectives are met.

However, such a framework will not fix any underlying crypto design flaws (for instance,

the lack of a credible nominal anchor, payments finality, or scalability).

Purported benefits of crypto assets include cheaper and faster cross-border payments,

increased financial inclusion, and greater portfolio diversification. Greater operational

resilience, and increased transparency and traceability of transactions, are also often

presented as benefits. However, a careful consideration of these purported benefits

suggests that many have not yet materialized, although the underlying technological

innovations could prove useful in the longer term.

There are many risks associated with crypto assets, although the significance and

relevance of specific risks differ by country circumstances. These include

macroeconomic risks, which encompass risks to the effectiveness of monetary policy,

capital flow volatility, and fiscal risks. There are also serious concerns about financial

stability, financial integrity, legal risks, consumer protection and market integrity, and

contestability. Some risks are inherent to the technology underpinning crypto assets,

while others stem from the lack of policies or their enforcement. Enforcement could be

January 4, 2023

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

2 INTERNATIONAL MONETARY FUND

particularly challenging as many crypto asset service providers are located in offshore jurisdictions

but market their services globally.

To address the risks of crypto assets, and harness benefits from underpinning innovative

technologies, this paper puts forward nine core elements of an effective policy framework:

1. Safeguard monetary sovereignty and stability by strengthening monetary policy

frameworks and do not grant crypto assets official currency or legal tender status.

2. Guard against excessive capital flow volatility and maintain effectiveness of capital flow

management measures.

3. Analyze and disclose fiscal risks and adopt unambiguous tax treatment of crypto assets.

4. Establish legal certainty of crypto assets and address legal risks.

5. Develop and enforce prudential, conduct, and oversight requirements to all crypto market

actors.

6. Establish a joint monitoring framework across different domestic agencies and authorities.

7. Establish international collaborative arrangements to enhance supervision and

enforcement of crypto asset regulations.

8. Monitor the impact of crypto assets on the stability of the international monetary system.

9. Strengthen global cooperation to develop digital infrastructures and alternative solutions

for cross-border payments and finance.

These elements can help inform a comprehensive, consistent, and coordinated framework for crypto

assets. However, it is important to note that individual countries will face different circumstances

and capacity constraints that may influence the sequence in which these elements are implemented.

Doing nothing is untenable as crypto assets may continue to grow in popularity despite the current

downturn. By adopting this framework, policy makers can effectively mitigate the risks posed by

these assets while also harnessing the potential benefits of technological innovation.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 3

Approved by

Tobias Adrian, Vitor

Gaspar, Pierre-Olivier

Gourinchas, Ceyla

Pazarbasioglu, and

Rhoda Weeks-Brown

Prepared by an inter-departmental team led by Arif Ismail (MCM),

comprising Gerardo Una (FAD); Marianne Bechara, Wouter Bossu,

Carine Chartouni, Ke Chen, Ender Emre, Alessandro Gullo, Grace

Jackson, Rose Nyongesa, Nadine Schwarz, Karla Vasquez-Suarez, and

Christophe Waerzeggers (LEG); Parma Bains, Agnija Jekabsone,

Tommaso Mancini-Griffoli, Fabiana Melo, Erica Sandoval, Nobu

Sugimoto, and Jay Surti (MCM); Martin Cihak (SPR); and Itai Agur,

Soledad Maria Martinez Peria, and German Villegas-Bauer (RES).

Overall guidance was provided by Dong He and Marina Moretti

(MCM); Ruud De Mooij (FAD); Yan Liu (LEG); Giovanni dell'Ariccia

(RES); and Kenneth Kang (SPR).

CONTENTS

INTRODUCTION ________________________________________________________________________________ 5

DEFINITIONS AND CLASSIFICATION OF THE CRYPTO ECOSYSTEM __________________________ 6

PURPORTED BENEFITS AND POTENTIAL RISKS _______________________________________________ 9

A. Purported Benefits ____________________________________________________________________________ 9

B. Potential Risks ________________________________________________________________________________ 11

POLICY AND REGULATORY RESPONSES ______________________________________________________ 17

A. Element 1. Safeguard Monetary Sovereignty and Stability by Strengthening Monetary Policy

Frameworks and Do Not Grant Crypto Assets Official Currency or Legal Tender Status _________ 18

B. Element 2. Guard Against Excessive Capital Flow Volatility and Maintain Effectiveness of Capital

Flow Measures __________________________________________________________________________________ 20

C. Element 3. Analyze and Disclose Fiscal Risks and Adopt Unambiguous Tax Treatment of Crypto

Assets __________________________________________________________________________________ 20

D. Element 4. Establish Legal Certainty of Crypto Assets and Address Legal Risks ______________ 21

E. Element 5. Develop and Enforce Prudential, Conduct, and Oversight Requirements to All Actors

__________________________________________________________________________________ 22

F. Element 6. Establish a Joint Monitoring Framework Across Different Agencies and Authorities

__________________________________________________________________________________ 28

G. Element 7. Establish International Collaborative Arrangements to Enhance Supervision and

Enforcement of Crypto Asset Regulations _______________________________________________________ 30

H. Element 8. Monitor the Impact of Crypto Assets on the International Monetary System _____ 31

I. Element 9. Strengthen Global Cooperation to Develop Digital Infrastructure and Alternative

Solutions for Cross-Border Payments and Finance _______________________________________________ 32

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

4 INTERNATIONAL MONETARY FUND

CONCLUSION __________________________________________________________________________________ 33

ISSUES FOR DISCUSSION ______________________________________________________________________ 33

BOXES

1. The Challenge of the Legal Classification of Crypto Assets _____________________________________ 8

2. Do Crypto Assets Provide Cheaper Payments than Traditional Systems ________________________ 9

3. The Rationale for Comprehensive Regulations ________________________________________________ 23

4. Potential Implementation Challenges _________________________________________________________ 28

FIGURES

1. Crypto-asset Market Capitalization_____________________________________________________________ 5

2. 60-Day Moving Correlations of Changes of Prices of Bitcoin and Other Assets _______________ 14

3. Price of Bitcoin and Ethereum After FTX Collapse ____________________________________________ 16

4. Market Capitalization of Crypto Market _______________________________________________________ 16

TABLE

1. Mapping Risks to Responses: Nine Elements of an Effective Crypto Policy Framework______ 18

ANNEXES

1. Classification of the Crypto Asset Ecosystem __________________________________________________ 35

2. Crypto Asset Standards and Guidance by Standard-Setting Bodies ___________________________ 37

3. The FTX Debacle: Strengthening the Case for Consistent and Comprehensive

Regulation _______________________________________________________________________________________ 37

References ______________________________________________________________________________________ 40

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 5

INTRODUCTION

1. Crypto assets are not new, but the strong push to design appropriate policies to deal

with them is. While crypto assets emerged

after the Global Financial Crisis, they were

not deemed to pose significant risks until

recently (FSB 2018

). The volatile rise in their

market capitalization, their growing

correlation with other financial assets, and

their adoption in many emerging markets

(

IMF 2021a) changed perceptions about

the risks of crypto assets and the need for

appropriate policies to address them (FSB

2022) (Figure 1). The collapse of some

crypto assets and failures of exchanges and

other players in the crypto ecosystem,

amid the recent slide in crypto valuations,

added impetus to this push.

2. Policymakers around the world have been developing a variety of national approaches

to crypto assets. Some countries have introduced outright bans on crypto assets, while others are

considering more targeted restrictions depending on their use cases. Many jurisdictions have been

experimenting with various degrees and combinations of regulation, supervision, oversight, and

taxation. On the opposite end of the spectrum, some countries have opted to grant unbacked tokens

legal tender status and have introduced more broadly a framework to incentivize their use, including

guaranteeing the existence of a convertibility mechanism with a fiat currency.

3. This paper’s main objective is to provide guidance to IMF members on key elements of

an appropriate policy response to crypto assets. This objective is in line with the IMF’s mandate to

support economic and financial stability across its membership. This paper addresses questions

raised by IMF member countries on the benefits and risks of crypto assets and on how to structure

an appropriate policy response. It operationalizes the principles outlined in the Bali Fintech Agenda

(IMF 2018) and builds upon the IMF’s recent research on regulating the crypto ecosystem and

stablecoins (Bains et al. 2022a, 2022b

), the effectiveness of capital flow measures in the digital age

(He et al. 2022), the energy use of crypto assets (Agur et al. 2022), as well as the macro-financial

implications of digital money across borders (IMF 2020).

A nearly $2 trillion decline in the value of crypto assets during the spring/early summer of 2022 took place after the

sudden collapse of an algorithmic stablecoin called TerraUSD and its sister token, Luna. Several crypto related firms,

such as the hedge fund Three Arrows Capital, the lending firm Celsius, and the crypto exchange FTX Trading, have

since filed for bankruptcy.

Additional publications include: (i) Virtual-Assets-and-Anti-Money-Laundering-and-Combating-the-Financing-of-

Terrorism-1-463654; (ii) Virtual-Assets-and-Anti-Money-Laundering-and-Combating-the-Financing-of-Terrorism-2-

463657; and (iii) Keeping-Pace-with-Change-Fintech-and-the-Evolution-of-Commercial-Law-511100.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

6 INTERNATIONAL MONETARY FUND

4. The paper aims to complement broader efforts by the international community to

ensure a comprehensive, consistent, and coordinated policy framework to address the risks

associated with crypto assets.

Standard-setting bodies responsible for different products and

markets have provided varying levels of guidance (Annex 2). For instance, the Financial Action Task

Force (FATF) updated its standard on anti-money laundering and combating the financing of

terrorism (AML/CFT) to explicitly include crypto assets and their service providers, and issued

guidance on a risk-based approach to its implementation. Actions by other standard setting bodies

range from broad principles for some types of crypto assets to rules for mitigating exposure risks of

regulated entities and setting up information exchange networks. While useful, these efforts have not

yet produced a comprehensive framework to manage risks to the macroeconomy, financial and

market integrity, financial stability, and consumer and investor protection. The IMF is particularly

well-suited to provide guidance on addressing the macroeconomic risks associated with crypto

assets.

5. The crypto asset ecosystem is evolving—an important caveat to this paper. Crypto

assets come in many forms and will likely continue to evolve, including in response to policy actions.

There are major data limitations, with business models still being developed. Therefore, effective

policies need to be flexible and able to adapt to new developments. The paper is organized as

follows: Section II sets out definitions and classifications of crypto assets; Section III discusses

purported benefits and potential risks associated with crypto assets; Section IV puts forward nine

core elements of effective policy frameworks that support a comprehensive, consistent, and

coordinated framework for crypto assets; Section V concludes; and Section VI raises issues for

discussion.

DEFINITIONS AND CLASSIFICATION OF THE CRYPTO

ECOSYSTEM

6. There are yet no globally consistent definitions and classification or taxonomy of

crypto assets.

The internet, advanced cryptography, and distributed ledgers (DLT) underlie crypto

assets. DLT is a set of technological solutions that enables a single, sequenced, standardized, and

cryptographically secured record of activity to be distributed and maintained by a network of

participants. This record could contain transactions, asset holdings, or identity data. DLT may be

closed (permissioned) or open (permissionless).

The IMF is playing a key role in international cooperation in this rapidly evolving area. Staff have collaborated with

and contributed to the work of bodies and organizations such as the Bank for International Settlements (BIS), the

Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), the

Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO), and the World Bank.

It has also provided policy advice to country authorities in bilateral surveillance and through capacity development.

A taxonomy offers a hierarchical relationship between items while a classification groups items along features or

attributes.

Permissioned DLT (also known as “closed DLT”) uses a ledger in which the consensus protocol requires participants

to be certified by an entity, or a consortium, prior to connecting to the network to read, write, or validate transactions.

Permissionless DLT (also known as “open DLT” or “public DLT”) uses a ledger in which anyone may participate in the

(continued)

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 7

7. To help organize the discussion on purported benefits, potential risks, and policy

responses, this paper uses a classification of existing crypto assets based on their key features.

The aim is not to provide a definitive categorization of assets that dictates how they should be

labelled in order to be appropriately licensed and regulated. The goal is instead to describe today’s

crypto-asset environment where crypto assets may be defined, classified, and treated differently in

each jurisdiction. The legal challenges pertaining to this exercise are captured in Box 1. Moreover, the

features of crypto assets will continuously evolve, partly in response to country policies.

8. Crypto assets, a broad term encompassing many different products, are privately

issued digital representations of value that are cryptographically secured and deployed using

distributed ledger technology. Under this broad definition, three categories stand out: unbacked

tokens, stablecoins, and other assets (Annex 1). This paper focuses on unbacked tokens (such as

Bitcoin) and stablecoins (such as USDC) because of their much larger scale and associated risks.

Public digital money such as central bank digital currencies are not covered by this paper.

• Unbacked tokens have no backing assets, are usually issued in a decentralized manner, are

transferable, have no redemption pledge, and provide no direct claims on the issuer. With no

backing assets, unbacked tokens have volatile prices, and are thus generally not well suited to

perform the main functions of money: store of value, medium of exchange, and unit of account.

Instead, they are mostly held in the hope that prices will rise.

• Stablecoins are centrally or decentrally issued crypto assets that aim to have a stable price

through reserve assets or through algorithms that respond to demand and supply.

Stablecoins

are generally denominated in a monetary unit of account, such as the dollar, and may pledge to

redeem into cash at par. The stablecoins that hold very safe and liquid assets as reserves and

offer direct legal claims on the issuer may be in a position to do so. However, others may fall

short, for instance if they hold risky or illiquid assets as reserves, or if they do not offer a legal

claim on the issuer or on the reserve assets. Even if they do, direct redemptions are often

constrained by how often withdrawals are allowed, fees, and other conditions, such as a

minimum withdrawal threshold. Many algorithmic stablecoins used in decentralized finance have

also proven to be volatile.

• Other tokens include utility and security tokens. Utility tokens are crypto assets that are

usually centrally issued and provide the token holder with access to an existing or prospective

product or service. These are usually limited to a single network (that is, the issuer), or a closed

network linked to the issuer, and have limited transferability. Use cases include loyalty programs

and access to pre-launch discounts. Security tokens are crypto assets that are usually centrally

consensus protocol, as no central authority can approve or deny participation. Permissionless DLT applications usually

rely on monetary incentives.

For example, Alvarez, Argente, and Van Patten (2022) studied a country experiment with bitcoin adoption, finding

only a limited potential for this crypto asset to become a medium of exchange. They found that despite a “big push,”

usage in everyday transactions has been low and concentrated among banked, educated, and young males.

Collateralization could involve a single asset or a basket of assets, including fiat currency, commodities (e.g., gold),

or other crypto assets.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

8 INTERNATIONAL MONETARY FUND

issued, transferable, and meet the definition of a security within respective jurisdictions. Their use

cases include tokenized equities, fractionalized non-fungible tokens, and initial coin offerings.

Box 1. The Challenge of the Legal Classification of Crypto Assets

Assigning crypto assets to specific legal categories is essential in order to provide clarity on how they will

be treated legally. This is important on three levels.

• First, the private law nature of crypto assets is essential for the predictability and enforceability of the rights

and obligations of the parties (e.g., whether and how these instruments can be owned, transferred, lent, or

pledged, and the rights available to their holders in case of the insolvency of the issuer or the custodian). This, in

turn, is key to market confidence and effective risk management and supervision.

• Second, classifying crypto assets under the financial law is necessary for regulating them through existing or

new prudential and conduct regulatory frameworks. Specifically, this will be essential to determine (i) the

prudential and resolution regime, including the competent authority and eligibility to access financial safety net

components; (ii) the market conduct rules; and (iii) the applicability of the legal regime governing financial

market infrastructures.

• Third, the tax treatment of crypto assets depends on their legal characterization (whether the asset is treated

as a commodity or as a means of payment) and on the country’s general tax policy settings. For example, if a

country’s income tax system broadly defines income and generally taxes capital gains, it would be appropriate

to apply this same treatment to income or gains from transactions involving crypto assets.

There are no generally accepted legal definitions of crypto assets. Even with newly adopted laws regulating

aspect of digital technologies (such as DLT laws), crypto assets definitions vary and are informed by the purpose

of the legislation. A key challenge in defining crypto assets is their diverse, complex, and/or novel features. A

few laws have defined the term “crypto assets” (EU’s Market in Crypto-assets Regulation; MiCA), while others

have adopted it without a legal description (Switzerland). Some countries have chosen to define the broader

category of “digital assets” deployed on DLT or similar technologies for general purposes (Liechtenstein and

Ukraine) or for specific tax purposes (India), while others have defined specific types of digital assets based on

their economic purpose (such as Singapore, which has done so to supplement existing payment laws. For

example, the EU and Japan have different definitions of crypto assets that have practical consequences. While

the EU's MiCA definition includes stablecoins that are pegged to a fiat currency, Japan's framework appears to

exclude them from the definition of crypto assets, allowing them to be issued only by banks and other

designated financial institutions.

The private law classification of crypto assets can vary widely. Depending on their design features and in

some cases contractual stipulations, crypto assets could be classified as a property, personal claims, or sui

generis assets, although no claim exists against an issuer of unbacked crypto assets, such as Bitcoin. The key

question is whether crypto assets can be qualified as “property” and thus subject to ownership rights. Some

jurisdictions have integrated crypto assets into general property law, while others, where the physical existence

of an object is still central to qualify as property, may face complexities. However, even when a crypto asset falls

within defined categories, applying traditional rules to these categories may still be challenging due to digital

nature of these assets and the use of DLT, particularly in a cross-border context. For instance, DLTs with nodes

across borders make it challenging to identify the law of the relevant jurisdiction applicable to crypto asset

transactions.

The financial law classification can be equally challenging. Crypto assets could generally be brought under a

broad array of existing financial law categories (e.g., such as a deposit, e-money, payment instrument, security,

other financial instrument, and commodity). This depends on the type of the asset, its private law nature, design

features and intended use, as well as existing financial law categories. Many regulatory authorities apply existing

legal categories on a case-by-case basis. While function-based taxonomies by regulatory authorities help

understand crypto assets, they do not necessarily provide legal certainty on their classification under financial

law.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 9

PURPORTED BENEFITS AND POTENTIAL RISKS

9. There are several benefits and risks that may be associated with crypto assets. The main

purported benefits include improved efficiency (higher speed and lower cost) of payments,

innovation, resilience, transparency, and financial inclusion. As discussed below, currently the benefits

seem to be tenuous, though they could still materialize, including through new designs of crypto

assets. Even if crypto assets do not have intrinsic value, the technological innovations underlying

them and continually emerging could be of value to society, e.g., smart contracts.

At the same time,

there are important risks associated with crypto assets, including macroeconomic risks, legal risks,

and risks to financial integrity and stability. Some risks are inherent to the technology underpinning

crypto assets (for instance, DLT), while others stem from the lack of policies or their enforcement. The

significance of specific risks also depends on country circumstances, and some risks may not

necessarily be relevant in all jurisdictions.

A. Purported Benefits

10. Crypto assets could achieve cheaper and faster payments by reducing the need for

intermediaries through the use of DLT. In online transactions, there is a need to verify that the

buyer has the necessary funds available and that these are not spent more than once. In the

traditional payment system, centralized intermediaries such as banks and credit card companies

perform this verification and typically charge fees for their services. Through decentralization, DLT

can do away with the need for centralized intermediaries, since information can be accessed,

validated, and updated jointly across a network of nodes. Nevertheless, crypto assets involve a

different type of intermediary, known as validators, which may contribute to transaction costs.

Moreover, in practice, other intermediaries beyond validators, such as exchanges and custodial wallet

providers, play an important role in the crypto ecosystem. Box 2 compares the current transaction

costs of unbacked tokens and traditional payment systems.

Box 2. Do Crypto Assets Provide Cheaper Payments than Traditional Systems?

Crypto wallets can be classified into hosted wallets, where a third party keeps the crypto assets for the user,

and self-custody wallets, where the user has full control over deposited funds.

Hosted wallets do not post all

the transactions performed by a user on the blockchain, thus avoiding the transaction costs that such

posting entails. Transactions not posted on the blockchain are recorded in the centralized data centers of

the wallet providers, in the same way as a commercial bank does when clients transfer funds within the same

bank. Commercial banks typically do not charge fees for such internal transactions, and the same is the case

Smart contracts are computer programs stored on a blockchain that run automatically when predetermined

conditions are met.

While macroeconomic and financial stability risks become relevant when adoption is significant, other risks such as

legal, financial integrity, operational, and consumer protection risks could materialize even if adoption is not high.

Validators in permissionless DLT are incentivized to propose valid transactions through rewards with newly minted

coins and transaction fees, both of which result in costs to existing users. In contrast, in permissioned platforms,

participants must be certified by an entity or consortium before they can join the network. This introduces ownership

and profit-maximization incentives. Fees are a potential way of generating profits.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

10 INTERNATIONAL MONETARY FUND

Box 2. Do Crypto Assets Provide Cheaper Payments than Traditional Systems? (concluded)

for crypto wallet providers.

Transactions that are posted on permissionless blockchains incur a network

fee,paid to crypto asset miners. The median Bitcoin network transaction fee over the last three years was

$2.72 (Statista). According to data from CoinDesk, the median value of Bitcoin transactions is presently

$93.61, implying a median transaction fee of 2.9 percent (Kaloudis and Young 2022). This is high compared

to most other forms of domestic digital payments and transfers.

However, certain types of cross-border

transfers, particularly small value remittances, regularly incur larger transaction fees. Beck,

Janfils, and

Kpodar (2022) calculate the average fee for a $200 remittance at 5.7 percent in 2020, with the 75th and 25th

fee percentiles equal to 7.7 and 4 percent, respectively. According to the World Bank Remittances Prices

Worldwide database, the cost could be in double digits for certain country corridors. This suggests that

crypto assets could be relatively cost efficient for remittances.

However, if costs associated with the

conversion of crypto to fiat currencies and vice-versa are included, the cost efficiency of crypto for

remittances becomes less clear, and is likely to depend on the corridor under analysis. There is evidence that

for the US-EU corridor, traditional intermediaries may be more cost efficient than crypto (Goldstein 2021).

On the other hand, the use of crypto assets for remittances in other corridors suggest that they may be cost

efficient in those cases.

Technological advances to reduce crypto costs are being developed (Agur et al.

2022), but their efficacy is yet to be determined.

____________________

CoinBase, Binance, Kucoin, and Bitfinex do not charge fees for intra exchange retail transfers. Crypto wallets generally do not

charge transaction fees beyond the blockchain network fees (e.g., Guarda, Trust Wallet, and Exodus). CoinBase Commerce

charges a 1 percent payment processing fee to merchants, while Bitfinex Pay and Kucoin do not charge fees to merchants. In

comparison, credit cards typically charge merchants an interchange fee of between 1 to 3 percent, while the fee is lower for debit

cards. Most banks offer credit cards which give cash back rewards of between 1 to 3 percent.

See Carare et al. (2022).

To mitigate the risks and protect the crypto asset markets from misuse, compliance with existing regulations, including

AML/CFT regulation, is necessary. But this comes at a cost for intermediaries, especially in cross-border payments where applying

customer due diligence measures to foreign parties may be more difficult and time costly. The current trend toward regulating

crypto assets may therefore also affect transaction costs.

For example, crypto assets have been gaining market share as a means of remittances on the U.S.-Mexico corridor, as reported

by, for example, , Coindesk and Cointelegraph

11. Crypto assets may spur private sector innovation by relying on DLT with open,

programmable, and composable architecture (Wharton 2021

). The source code of public

blockchains is generally widely available, allowing for the possibility to reutilize code developed by

others and to build on top of it to create new financial services. Such diffusion of knowledge has the

potential to promote innovation and to increase market competition.

12. DLT systems with multiple copies of the ledger of transactions and nodes performing

validation activities may provide higher operational resilience than centralized entities. Even if

several nodes become non-operational or malicious, the rest would keep the system running.

13. Crypto assets that rely on an open DLT architecture allow for transparency and

traceability of transactions, though not necessarily of users. Crypto assets whose ledger is

publicly accessible allow for blockchain analytics that could be used to identify illicit transactions

based on automated triggers. “Regtech” and “suptech” can be deployed to enhance regulatory

Higher resilience and transparency, achieved through decentralization, may come at the cost of lower transaction

validation speed. This is referred to as “the blockchain trilemma.”

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 11

compliance and supervision. Challenges that blockchain analytics face include geo-blockers, off-

chain transactions, and privacy enhancing mechanisms (He et al. 2022; IMF 2021

14. Crypto assets’ use of DLT may enhance financial inclusion, depending on their ability to

increase access and reduce transaction costs. DLT could improve financial inclusion by making it

easier for the unbanked population to access payment services and lowering prices and fees.

Evidence suggests that this might be the case for small value cross-border transactions along some

corridors (see Box 2). However, the high costs to cash in and out, as well as the need for some

degree of digital literacy and internet connectivity, likely reduce the financial inclusion potential of

crypto assets.

12,13

15. Unbacked tokens have been used to enhance portfolio diversification, but this

potential use has decreased over time.

The prices of these tokens have become more correlated

with other financial assets as they have become more mainstream and held by financial institutions

(FSB 2022; Iyer 2022

). This has reduced their usability for diversification purposes.

B. Potential Risks

Macroeconomic

16. The widespread adoption of crypto assets could threaten the effectiveness of monetary

policy. The transmission of monetary policy would weaken if firms and households prefer to save

and invest in crypto assets that are not pegged to the domestic fiat currency (IMF 2020).

The risk of

currency substitution (“cryptoization”) is particularly pertinent for countries with unstable currencies

and weak monetary frameworks.

Cryptoization is more likely to be associated with the adoption of

stablecoins denominated in foreign currencies which, relative to other crypto assets, can offer a less

volatile alternative to the domestic currency. The decentralized and anonymity features of certain

crypto assets, which make their regulation challenging, ease their accessibility and their potential use

for circumventing existing capital control measures. This may incentivize substitution to crypto assets

rather than to reserve currencies like the dollar or euro, even though the latter might still represent a

safer alternative to domestic currencies. The adoption of crypto assets as official currency or legal

tender may further incentivize their adoption and weaken monetary policy effectiveness.

17. Crypto asset usage could also have implications for capital flows’ volume and volatility.

If crypto assets have lower cross-border transaction costs than existing asset classes, they may create

Households with bank accounts can more easily switch their holdings from fiat to crypto than those without (Shy

2021). Most Bitcoin ATMs charge fees typically above 10 percent to buy Bitcoin with cash (see CoinATMradar).

Despite the legal tender status in El Salvador, bitcoin adoption has not improved financial inclusion (Kapsoli and

Ponce, forthcoming).].

See Guesmi et al. (2019) and Akhtaruzzaman et al. (2020).

Monetary transmission refers to the extent to which policy-induced changes in monetary instruments (e.g., the

nominal money stock or the short-term nominal interest rate) can affect macroeconomic variables.

As noted in October 2021 Global Financial Stability Report, “cryptoization” refers to both currency and asset

substitution.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

12 INTERNATIONAL MONETARY FUND

additional incentives for investors to allocate capital across borders. Gross capital flows could

increase as a result, as could capital flow volatility, given the large price volatility of unbacked tokens

and the potential for herding behavior by investors across borders.

Although global crypto asset

trading volumes remained relatively small as compared to other financial market transactions,

crypto-related capital flows could be significant for countries where local adoption of crypto assets is

relatively high (Chainalysis 2022).

18. The adoption of crypto assets could erode the effectiveness of capital flow measures

(CFMs), which may limit countries’ ability to counteract capital flow volatility.

First, crypto

assets may not be covered by existing CFM laws and regulations and authorities may not have a

mandate and powers to control their use. Second, particularly for pseudonymous crypto assets,

prosecution and sanctioning may be difficult.

Third, crypto asset trades may not involve any

intermediaries or service providers that can be held responsible to comply with CFM laws and

regulations and that can verify the identities of transacting parties and the nature of transactions.

Lastly, crypto asset service providers might not be regulated. As existing CFM regulations are

typically enforced through regulated entities, this limits their effectiveness (He et al. 2022

19. A potential rapid proliferation of crypto assets can affect the international monetary

system. Crypto assets, as noted, have been mostly held in the hope that prices will rise, with only

limited use as a medium of exchange. Despite this, the strong correlations between payment

currency and reserve currency shares suggests that the adoption of crypto asset for payment

purposes might eventually lead to a demand for crypto asset reserves. However, a significant

increase in crypto efficiency and payment usage would be necessary before we see a material change

in the existing reserve configuration.

Illustrative network-model analysis suggests that crypto asset-

induced shocks could result in substantial reserve losses across the international monetary system,

leading to increased demand for Global Financial Safety Net resources.

20. The spread of crypto assets can increase fiscal risks for public finances. New fiscal risks

can arise from the financial sector’s exposure to the crypto assets ecosystem, the lack of clarity of tax

regimes, and the extra-territorial nature of crypto assets. The wide adoption of crypto assets in a

Stablecoin issuers and their custodians can move from one jurisdiction to another at a very low cost, potentially

being an additional source of capital flows and their volatility.

According to Chainalysis (2022), the top 20 countries where the most people are putting the biggest share of their

money into cryptos are Vietnam, Philippines, Ukraine, India, United States, Pakistan, Brazil, Thailand, Russia, China,

Nigeria, Türkiye, Argentina, Morocco, Colombia, Nepal, United Kingdom, Ecuador, Kenya, and Indonesia.

Even without considering flows related to crypto assets, there is no consensus on the level of effectiveness of

capital flow measures (Magud et al. 2011; Forbes et al. 2015; Landi and Schiavonne 2021

)

Not all crypto assets are pseudonymous. Some stablecoins require clear identification of the user. Pseudonymous

crypto assets shield the identity of the user by using a pseudonym (e.g., a crypto wallet address) instead of the real

name.

The demand for currencies to be held in reserves is closely related to strong legal and macroeconomic frameworks

and these factors do not change rapidly over time.

Fiscal risks are factors that may cause fiscal outcomes to deviate from expectations or forecasts. These factors

comprise potential shocks to government revenues, expenditures, assets, or liabilities, which are not reflected in the

government’s fiscal forecasts or reports (IMF 2019).

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 13

weakly regulated environment could increase the likelihood of facing explicit and implicit fiscal risks

from the financial sector. In turn, crypto assets, particularly if pseudonymous, can affect tax revenue

collection and compliance, even when not adopted as legal tender. The use of withholding taxes and

third-party information is challenging for crypto assets. Decentralized peer-to-peer (P2P) activities

increase the reliance on voluntary compliance and self-reporting. Even if supervised institutions are

required to report crypto-related activities to tax authorities, some institutions may fall outside of the

scope of such regulations (e.g., because they are still unregulated or reside abroad).

21. Granting a crypto asset official currency or legal tender status has far-reaching

consequences for monetary stability. If a crypto asset were granted official currency or legal

tender status, creditors would be required to accept it in payment of monetary obligations, including

taxes, similar to notes and coins (currency) issued by the central bank. Governments can also enact

legislation to encourage the use of crypto assets as an official currency, serving as both a unit of

account for monetary obligations and a mandatory means of payment for everyday purchases. But

there are consequences. If goods and services are priced in both an official currency and a crypto

asset, households and businesses would spend significant time and resources choosing which money

to hold as opposed to engaging in productive activities. And domestic prices could become highly

unstable. Even if all prices were quoted in, say, Bitcoin, the prices of imported goods and services

would still fluctuate massively, following the whims of market valuations.

22. Granting a crypto asset official currency or legal tender would also amplify fiscal risks.

If a crypto asset that is not pegged to the domestic fiat currency, or whose peg may not be

sustainable, is adopted as an official currency or granted legal tender status, government revenues

may be exposed to exchange rate risk if taxes or non-tax revenues

are quoted in advance in a

crypto asset while expenditures are primarily made in the local currency. Moreover, contingent

liabilities arise if convertibility to fiat currency is guaranteed by the government. and if the

operationalization of such convertibility is through the establishment of public digital e-wallets and

trust funds held in public development banks. In addition, the adoption of a crypto asset as official

currency or legal tender could affect a government’s social policy objectives, particularly for

unbacked tokens, as their high price volatility could affect poor households more. The adoption of a

crypto asset as a legal tender, which would allow the government to use it as a means of payments,

could also significantly impact public financial management.

Finally, taxpayers may be able to gain

a tax advantage where the application of tax laws to crypto asset transactions is uncertain or

otherwise incomplete. The risk of tax avoidance and evasion is heightened in the case of cross-

There are two main categories of non-tax revenue in the public sector. The first is non-tax revenue generated by

royalties, such as those from extractives sectors and dividend payments from state-owned enterprises. The second is

non-tax revenue from fees for good and services provided by government agencies, such as passport issuance, port

fees, agricultural services charges, police fines and penalties, as well as some health and education services. Crypto

assets as a legal tender could affect mainly the first category.

The utilization of crypto assets as a legal tender could impact the functioning of the treasury single account (TSA),

an essential element of treasury management, by adding numerous e-wallets over existing subaccounts/bank

accounts. This can weaken active cash management practices, tangle liquidity management, and require significant

investments to adjust the TSA design and operationalization. For fiscal reporting, measurement of value and

registration issues may arise in accounting due to high volatility in the price of unbacked crypto assets. This can affect

the value of payments and, depending on the timing of crypto assets conversion, impact the reliability of fiscal

reports.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

14 INTERNATIONAL MONETARY FUND

border transactions due to potential differences in classification of crypto assets by different

jurisdictions.

23. Granting a crypto asset official currency or legal tender status could raise significant

macro-critical legal issues. Legal tender status requires that a means of payment be widely

accessible. However, internet access and technology needed to transfer crypto assets remains scarce

in many countries, raising issues about fairness and financial inclusion. Moreover, the official

monetary unit must be sufficiently stable in value to facilitate its use for medium- to long-term

monetary obligations.

And changes to a country’s legal tender status and monetary unit typically

require complex and widespread changes to monetary law to avoid creating a disjointed legal

system.

Financial Stability

24. Unbacked tokens and stablecoins without credible backing may pose financial stability

risks. Sharp declines in crypto asset

prices can have large negative effects on

the balance sheets of investors. Financial

institutions may hold crypto assets

directly to pursue trading, custodial, or

market-making activities. They may also

be exposed to crypto asset volatility

indirectly if they provide credit or other

financial services to crypto asset trading

platforms and wallet providers,

institutional or retail investors in crypto

assets, or if they accept crypto assets as

collateral for lending. Moreover, a rapid

adoption of crypto assets may pose financial stability and credit provision concerns due to changes

in bank funding models.

Spillovers may materialize if financial institutions are closely connected.

Figure 2 is an illustration of interdependencies with traditional financial market.

25. Some forms of crypto assets come with risks to ecosystem governance. DLT allows for

governance rights to be decentralized through governance tokens (Aramonte et al. 2021

). As

governance tokens are traded on the market, an attacker who gathers enough voting rights may

impose policies that allow him or her to drain funds from users (

Wharton 2021).

Due to the current

lack of regulation, the draining of funds is currently not penalized.

This raises several macro-critical issues. For unbacked crypto assets, how can monetary obligations be expressed in

a monetary unit with high volatility? For private stablecoins, what would be the effect on the discharge of monetary

debt when the stablecoin is delivered in payment and its market value is “below par”? And what happens with debt

discharge if the stablecoin subsequently ceases to exist?

Banks typically rely on retail depositors to fund their operations. If crypto adoption rises, banks might have to pay

higher rates on deposits or see their funding shift from stable, low-cost deposits to more expensive, less stable

wholesale funding. Banks might respond by taking on greater risks to support profits.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 15

26. Crypto asset platforms with an open architecture could be subject to significant cyber

risks as they allow anyone to create malicious protocols or protocols with bugs (errors).

Anyone can create open DLT applications in an unregulated manner.

Even when the code is

publicly available, its complexity means that many applications with bugs become widely used before

the bug is discovered. Users have financial incentives to take advantage of bugs at the expense of

others rather than report them. Accessing crypto assets through self-custody wallets creates the

additional risk of password loss. By their nature, combined with a lack of regulation, recourse is not

possible.

Financial Integrity

27. Due to their pseudonymous nature, crypto assets can be attractive to criminals, raising

financial integrity risks. Although in most DLT networks transactions are public and therefore

visible, linking an address or wallet to an individual can be challenging. While the value of crypto

assets involved in most criminal cases detected so far has been relatively small compared to those

using traditional financial products and services, some known cases of misuse involve relatively large

amounts (FATF 2021

). Crypto assets can be misused to commit a range of crimes (e.g., fraud, theft,

tax evasion, and terrorist financing) and launder the proceeds of these or other crimes (e.g.,

corruption).

Alnasaa et al. (2022) find that crypto asset usage is significantly and positively associated

with higher perceptions of corruption.

Legal Risks

28. The legal classification of crypto assets and the application of existing rules to them

pose significant challenges, leading to uncertainty and potential legal risks. In particular,

uncertainties in the application of private laws (e.g., insolvency law) could result in the parties to a

crypto asset arrangement facing different risks than those envisaged at the time of the transaction.

For example, holders of crypto assets could face the risk of having their rights recharacterized as

unsecured personal claims instead of proprietary rights in the event of the insolvency of an

intermediary. This could give rise to financial instability if it occurs on a large scale. If not clearly

included in existing financial law classifications, a crypto asset may fall entirely or partially outside the

regulatory framework, leading to regulatory arbitrage or inadequate handling of financial stability

risks. These uncertainties may also expose the private sector to the risk of unpredictable supervisory

actions, curbing financial innovation, while exposing the regulatory authorities to the risk of

successful legal challenges due to a broad interpretation of their mandates. Finally, legal risks,

including conflict of law challenges, are heightened in cross-border transactions due to differences in

legal classification and treatment of crypto assets across jurisdictions.

As with any new technology, operational resilience is an area of concern. DLT is a general purpose technology. Its

adoption relies heavily on third-party providers. The lack of consensus on common standards is still prevalent and

there is no generally adopted framework for performing quality assurance on core algorithms and code.

For example, one estimate puts the share of Bitcoin lost in wallets at 17-23 percent of all mined Bitcoin, and

individual investor losses worth hundreds of millions of U.S. dollars have also been documented.

These risks are even more evident in fragile states with high levels of corruption and weak rule of law, where

institutions often lack the capacity to properly enforce and protect contractual and property rights.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

16 INTERNATIONAL MONETARY FUND

Consumer Protection

29. Consumer protection risks arise when consumers and investors are unaware or do not

fully comprehend the risks associated with crypto assets. Risks to consumers stem from

inadequate governance, opaque decision-making processes, and limited recourse when there is

insufficient regulation. Consumer protection risks may also arise from price volatility, fraud, or cyber-

attacks.

The filing for bankruptcy protection in November 2022 by FTX, a major crypto exchange,

revealed risky investments, inadequate governance, and opaque corporate interlinkages. The run on

FTX exerted significant spillovers on major crypto assets and also impacted decentralized finance and

stablecoin markets, ultimately impacting investors (Figures 3 and 4). Similarly, the fallout of the third

largest stablecoin, TerraUSD (UST), in May 2022 highlighted significant risks to investors. The

stablecoin experienced significant redemptions culminating in the breakdown of the entire Terra

ecosystem.

Market Integrity and Contestability

30. Crypto assets can suffer from market contestability issues. Permissionless crypto assets’

scalability constraints may cause congestion, leading to high transaction costs and fragmentation

(BIS 2022).

The presence of multiple blockchains may generate interoperability problems. Instead,

for permissioned DLT, the value of networks and returns to scale make the market prone to

concentration risks and market power. Permissioned platforms, including for digital currencies issued

by “big techs,” could use their networks to shut out competitors and monetize information, using

proprietary data on customer transactions.

For a listing of some of the largest crypto frauds, see https://alts.co/cryptos-biggest-scams-of-all-time).

Scalability constraints can make it difficult to withdraw and transfer funds during runs, and may also cause

transaction fees to skyrocket. On April 21, 2021, Bitcoin transaction fees peaked at $62.79 (Statista).

In permissionless blockchains, consensus mechanisms may favor concentration. For instance, under proof-of-stake,

richer individuals or entities with more crypto assets to stake are more likely to be selected to validate and thus to

receive compensation in newly minted crypto assets (Bains 2022).

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

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31. Crypto assets are also prone to manipulation and therefore to fraud and market

integrity risks. In permissionless DLT, users can set the fees of their own transactions to rank higher

or lower in the settlement queue and obtain financial gains. Large validators could congest the

blockchain with artificial trades (Bains 2022), raising the fees that other users pay them (

Aramonte,

Huang, and Schrimpf 2021). Moreover, illiquidity of certain exchanges or crypto assets may facilitate

price manipulations - to trigger liquidations and purchase liquidated collateral at a discounted price

or short the collateral asset (

Werner et al. 2021).

32. Additional risks inherent to some forms of crypto assets include uncertainty in

payment finality and environmental risks. Many types of consensus mechanisms that underpin

public blockchains can only deliver probabilistic settlement due to the possibility of forks in the

blockchain, which might cancel earlier transactions (Bains 2022

). In addition, crypto assets based on

proof-of-work consensus mechanisms are highly energy intensive and generate large amounts of e-

waste (

De Vries and Stoll 2021).

POLICY AND REGULATORY RESPONSES

33. The paper proposes a policy framework comprising nine elements to address the risks

and harness the potential benefits of crypto assets. The first three elements relate to

macrofinancial risks, while the next three address risks to legal certainty; safety, and soundness of the

financial system; financial integrity; consumer, and investor protection; and market integrity and

contestability. Elements seven to nine address the importance of enhanced global coordination and

collaboration, given the extra-territorial nature of unbacked tokens and stablecoins. They also

envision the use of technological innovations for public policy purposes, such as enhancing cross-

border payments. Country circumstances and capacity constraints may condition the sequence of

implementing the elements of this framework.

Other examples include matching orders, that is, the buying and selling of the same asset to increase trading

volume and interest in the asset. DeFi allows for other forms of attacks, including attacks exploiting smart contract

vulnerabilities and attacks executed within a single transaction (Werner et al. 2021)

However, other consensus mechanisms are much more energy efficient than proof-of-work, and if properly

designed, DLT may be more energy efficient than existing payment systems (Agur et al. 2022

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

18 INTERNATIONAL MONETARY FUND

A. Element 1: Safeguard Monetary Sovereignty and Stability by

Strengthening Monetary Policy Frameworks and Do Not Grant Crypto

Assets Official Currency or Legal Tender Status

34. Robust macroeconomic policies and credible institutional frameworks are the first line

of defense to protect monetary sovereignty and stability. A lack of credible domestic institutions

and policies is the most common root cause of substitution pressures into foreign fiat currencies,

and the same is the case for the pressures to substitute into crypto assets. A weak monetary policy

framework (MPF), combined with large fiscal deficits and government pressures for central bank

financing, are likely to undermine monetary credibility and instigate currency substitution (Adrian et

al. 2021; IMF 2020). Therefore, the most effective way to limit substitution into crypto assets is to

develop effective monetary frameworks and fiscal and monetary policies that maintain monetary

credibility.

35. An effective MPF safeguards monetary sovereignty by being transparent, coherent,

and consistent (IMF 2015; IMF 2021b; Unsal, Papageorgiou, and Garbers 2022

). A MPF encompasses

elements of the design, implementation, and communication of monetary policy as well as the legal

foundations for the independence and accountability of the central bank. A transparent MPF helps

the public understand the MPF and monetary policy actions (

IMF 2020). A coherent MPF

incorporates desirable features or principles, such as having a forward-looking policy strategy and

timely and regular communications. A MPF is consistent when the central bank’s policies and

operations are in sync with its communications. A transparent, coherent, and consistent MPF helps

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 19

anchor market expectations, curb currency substitution, and ensure the effectiveness of monetary

policy.

36. Avoiding large deficits and high debt levels would also protect monetary sovereignty,

especially in the context of weak MPFs. In countries where fiscal deficits are large and debt levels

are high, governments are more likely to put pressure on the central bank to provide monetary

financing and not to tighten monetary policy, in order to avoid raising the cost of sovereign

borrowing. The inflationary consequences of this fiscal dominance could increase pressures toward

currency substitution.

37. To protect monetary sovereignty and stability, crypto assets should not be granted

official currency or legal tender status. Almost all monetary laws recognize that the issuance of

officially recognized means of payment is a task of the State, and therefore only recognize “high

quality” public means of payment (banknotes and coins issued by the Treasury or the central bank)

as “currency” (Bossu et al. 2020). In this light, and considering the fundamental risks they pose,

unbacked crypto assets and privately issued stablecoins should not be recognized as “currency.” This

would be different for crypto assets backed by a public institution, such as the State itself, a central

bank, or a monetary institute.

38. Financial stability considerations also support the argument against granting official

currency or legal tender status to crypto assets. Crypto assets with official currency or legal tender

status could increase adoption and exposures of banks and other regulated financial institutions,

thereby amplifying many of the risks noted in the prior section. Moreover, significant financial and

reputational risks could arise if a country decides to use a crypto asset for financial relations with the

formal international financial system (e.g., correspondent banks, including relations with the IMF, and

other central banks). Due to the risks and concerns about destabilizing impacts on the IMS, central

banks should not hold unbacked crypto assets or privately issued stablecoins as part of their official

reserve assets.

39. In cases where a crypto asset is granted official currency or legal tender status,

governments should minimize their exposure to fiscal and operational risks. Governments

should minimize their use for official payments. Government revenues would be exposed to high

variations if taxes are quoted in crypto assets and if operations of e-wallet are handled by state-

owned enterprises (SOEs). Guarantees on the convertibility of crypto assets to fiat currency should be

avoided so the ministry of finance does not become exposed to contingent liabilities. Risks to fiscal

management operations (such as budget execution, treasury management, fiscal reporting,

IMF (2015) provides guidance on key elements of effective monetary policy frameworks for low- and lower-middle

income countries. Unsal et al. (2022) provide a multidimensional characterization of monetary policy frameworks

across three pillars—independence and accountability; policy and operational strategy; and communications—for 50

advanced and developing countries between 2007 and 2018.

Catão and Terrones (2001) and Agur et al. (2022) present evidence of a non-linear association between fiscal

deficits and inflation, showing a large and significant impact on inflation among developing countries and countries

with high inflation. Vieira, Holland and Resende (2012) show that higher debt levels and default risk are associated

with higher levels of dollarization.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

20 INTERNATIONAL MONETARY FUND

internal/external audits, and rent seeking) should also be clearly identified and managed with

adequate safeguards, controls, and procedures.

B. Element 2: Guard Against Excessive Capital Flow Volatility and Maintain

Effectiveness of Capital Flow Measures

40. Policy makers should contemplate various measures to counter the erosion of capital

flow measures (CFMs) arising from crypto asset adoption This includes clarifying the legal status

of crypto assets and ensuring that CFM laws and regulations cover crypto assets and are effectively

applied to the various actors in the crypto ecosystem, ideally also abroad. Moreover, by addressing

data gaps and applying new regulatory and supervisory technologies, authorities can create anomaly

detection models and red-flag indicators that can facilitate timely risk monitoring and CFM

implementation (He et al. 2022).

41. Greater exchange rate flexibility may be needed if CFMs become less effective. The

trilemma of international finance implies that countries face a tradeoff between maintaining

monetary autonomy, exchange rate stability, and financial openness. Many developing economies

employ CFMs and maintain both a degree of monetary autonomy and (partially) fixed or managed

exchange rate regimes. If the use of crypto assets leads to a greater circumvention of CFMs, and

efforts to reestablish the traction of such measures prove insufficient, authorities may face a choice

between gradually shifting toward increased exchange rate flexibility and relinquishing a degree of

monetary autonomy.

42. Managing an increased risk of sudden capital outflows could involve a recalibration of

international reserves. Holding international reserves comes at an opportunity cost to a central

bank, because the safe assets in which such reserves are commonly held have low returns. However,

the main benefit of international reserves is that they can provide a buffer against the sudden onset

of a balance of payments crisis. When the risk of sudden capital outflow episodes increases, as could

occur with a greater use of crypto assets, even if regulated, the benefit of holding international

reserves becomes more prominent and central banks may judge that the optimal level of reserves

has risen. If so, the macroeconomic policy mix may require adjustments, such as tighter monetary

and/or fiscal policies.

C. Element 3: Analyze and Disclose Fiscal Risks and Adopt Unambiguous

Tax Treatment of Crypto Assets

43. Fiscal risks in the financial sector generated by the adoption of crypto assets should be

analyzed, quantified, disclosed, and monitored as part of government fiscal risk management.

The exposure of the government to fiscal risks emerging from crypto assets should be properly

quantified and monitored in a timely fashion. The spread of the crypto assets ecosystem and its wide

Audit functions would also need strengthening for oversight of crypto assets operations in the public sector,

including audit of transactions, nodes, and e-wallets. If these procedures are not adopted, rent-seeking risks could

materialize by delaying the settlement timing between the e-wallets and treasury information systems in a context of

high volatility of crypto asset prices.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 21

adoption in a weakly regulated environment could amplify government exposure to financial sector

risk. Monitoring and identification of risks generated by highly volatile assets, recognizing the

challenges this poses, can increase the government’s ability to mitigate and respond to them,

thereby underpinning fiscal credibility and the sustainability of public finances.

In addition, this

information should be included in the government’s fiscal risk statement as part of the budget

documentation submitted to law makers to promote fiscal transparency (IMF 2019).

44. Tax policy should ensure an unambiguous tax treatment of crypto assets, while tax

administrations must reinforce tax compliance. Specific regulations are required to clarify the tax

treatment of crypto assets, both for income/wealth and value-added taxes.

Tax administrations

should exploit opportunities to use third-party information where feasible, e.g., where intermediaries

are involved, such as exchange providers, brokers, and dealers, or where trade in assets is settled

centrally. Fostering collaboration on cross-border information sharing and financial regulations in

this area is critical for tax compliance. This could involve following the recently developed Crypto

Asset Reporting Framework (CARF) proposed by OECD (2022

). T To complement these efforts, there

should be improvements in institutional capacity, including investments in specialized data

infrastructure and analytics to support risk analysis and tax audits related to crypto assets operations,

as well as prioritizing training and the technical capabilities of tax administration staff to understand

and implement the relevant procedures.

D. Element 4: Establish Legal Certainty of Crypto Assets and Address Legal

Risks

45. To establish legal certainty, jurisdictions should consider three actions. The following are

not mutually exclusive and may involve law reforms, and should be developed with private sector

participation and in line with international organizations’ guidance:

• Modernize private law through targeted legislative reforms (Garrido et al. 2022). Private

law may need to be modernized to clarify the classification of crypto assets and the rules

governing their transactions. Legislative reforms targeting the areas of friction between private

law and new technologies might be best (such as the reforms in Switzerland, Liechtenstein, and

Germany) to avoid delays and inconsistencies with the broader framework (Allend 2020).

The IMF Fiscal Transparency Code provides a set of principles and practices to enhance transparency of fiscal risks

analysis and management, in addition to fiscal reporting, fiscal forecasting and budgeting, and resource revenue

management areas (IMF 2019).

Taxation might also play a corrective role to complement regulatory interventions. The most obvious correction

relates to externalities from energy use in proof-of-work mechanisms. In the absence of appropriate carbon pricing,

for instance, mining activities could be subject to a corrective tax or, at least, be denied income tax deduction for

energy costs.

One example of international cooperation in this area is the ongoing initiative on Digital Asset and Private Law

Principles by the International Institute for the Unification of Private Law.

Targeted legal amendments are often more desirable than a complete overhaul of the private law system.

However, it is important for jurisdictions undergoing a major overhaul to also consider the inclusion of provisions for

crypto assets.

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22 INTERNATIONAL MONETARY FUND

• Clarify financial law treatment of crypto assets. This can be achieved in a variety of ways

(Blandin et al. 2018). Existing legal and regulatory frameworks can be enforced where activities

involving crypto assets fall within the established legal categories (e.g., when a stablecoin

arrangement fits into the description of e-money). Another way is to amend existing laws to

explicitly cover certain activities related to these assets for specific purposes (e.g., Japan).

third route is for jurisdictions to issue bespoke laws on crypto assets (e.g., the EU‘s MiCA), or set

up a distinct legal framework applied to a set of (typically Fintech) activities of which crypto asset

activities are a subset (e.g., Malta, Mexico).

• Mitigate the tax risk from transactions involving crypto assets. This requires a transparent

and predictable tax law framework, complemented by international cooperation. While tax laws

generally apply to crypto assets based on their general legal characterization, tax laws may need

to be further adjusted to provide clarity and certainty, and to achieve a country’s specific policy

objectives.

However, the complex and constantly evolving nature of crypto assets requires tax

administrations to complement existing tax law frameworks with timely and comprehensive

guidance to taxpayers to ensure transparency and predictability of treatment. In addition to

clarifying substantive tax obligations, countries should also provide clarity on payment and

reporting obligations, including by crypto asset service providers.

E. Element 5: Develop and Enforce Prudential, Conduct, and Oversight

Requirements to All Actors

46. This element builds on the premise that comprehensive regulation is preferable to

outright bans. For a discussion of the pros and cons of bans versus regulations and targeted

restrictions see Box 3.

47. Crypto asset service providers should be licensed, registered, or authorized. Entities that

provide functions such as storage, transfer, exchange, and custody of reserves and assets should be

subject to rules similar to those applied to financial service providers, with additional requirements to

reflect their new business models (such as combined exchanges and wallets). Licensing and

authorization criteria should be clearly articulated, the responsible authorities clearly designated, and

For a summary of the legislative amendments made in Japan’s Payment Services Act and other relevant laws to

promote financial innovation and to ensure user protection, see Annex IV of the

Review of the FSB High-level

Recommendations of the Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements: Consultative

report.

See Malta’s Virtual Financial Assets Act and Mexico’s Law to Regulate Financial Technology Institutions.

For instance, where a country’s policy objective is to encourage the use of a crypto asset as a means of payment, it

will need to consider its tax treatment compared to other potential investment assets. El Salvador, for instance,

exempts transactions involving Bitcoin from capital gains tax (Annex 4). A more balanced approach is included in a bill

introduced in the U.S. Senate in June 2022 titled the “Responsible Financial Innovation Act.” To promote the use of

virtual currency in retail transactions, the bill proposes a “de minimis” tax exemption of up to $200 in gains realized

from using virtual currency in personal transactions for the purchase of goods or services.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

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coordination mechanisms among them well defined.

48. Where global standards exist and can be mapped onto crypto assets, authorities

should implement these standards into domestic regulation. Currently, global standards have

focused on either sectors (banking), issues (financial integrity), or specific products (global

stablecoins). International work to establish comprehensive recommendations for crypto assets is

being taken forward by the Financial Stability Board (FSB) and international standard setting bodies

(SSBs).

Annex 2 provides a snapshot of the progress on the development of standards. Where

standards exist—for example, the FATF standards on AML/CFT, and the International Organization of

Securities Commissions’ (IOSCO) guidance on exchanges—these should be implemented. Standards

should encompass both the safety of the underlying assets as well as the network that facilitates the

transfer of the assets. Guidance may be drawn from CPMI and IOSCO’s Principles for Financial

Market Infrastructures (PFMI) to address issues related to transfer, governance, and risk management

of the infrastructure and networks, or those related to the safe settlement of assets.

Box 3. The Rationale for Comprehensive Regulations

Comprehensive regulations are preferred to blanket bans. Comprehensive regulations should address the specific

features of crypto assets that generate externalities, such as those that enable high degrees of anonymity (which could

facilitate illicit transactions) or lead to environmental burden (for example, when proof-of-work consensus mechanisms

are used). Additionally, regulation, as it relates to consumer protection, is needed to address internalities—cases where

consumers do not fully take into account the costs of using or holding crypto assets (e.g., volatility in value, possible

losses due to cyber-attacks).

Issuing warnings and increasing the availability of information can also be helpful, but it

might not be sufficient to address externalities and internalities. Moreover, it can provide legitimacy to the market,

facilitating closer links with wider financial services that could generate systemic risks without adequately addressing

them.

Blanket bans that make all crypto asset activities (e.g., trading and mining) illegal may stifle innovation and drive

illicit activities underground. The crypto ecosystem is undergoing rapid change. There is much uncertainty about the

extent to which this change will ultimately materialize as productive innovation. Allowing the system to develop (with

proper regulation) will allow policy makers to learn about these potential benefits and better mitigate risks (including

financial integrity risks), while bans may inadvertently increase the risk exposure.

Bans can be costly to enforce and increase the incentives for circumvention due to the inherent borderless nature of

crypto assets, resulting in potentially heightened financial integrity risks, and can also create inefficiencies. A decision to

ban should be informed by an assessment of money laundering and terrorist financing (ML/TF) risks, and other

considerations, such as large capital outflows and other public policy aims. Regulations imply that certain forms of crypto

assets will still be available in the legal marketplace, and thus the degree of substitutability of illegal versus legal assets is

likely to be much larger relative to blanket bans of crypto assets.

When substitute assets are not widely available in legal markets, users may be more motivated to access illegal

markets and willing to pay higher prices for these assets, due to the stronger incentives to obtain them. A higher

willingness to pay for illegal assets increases the profits to those providing such assets, thus raising the incentives for

circumvention. Higher incentives for circumvention imply higher enforcement costs. Moreover, as incentives to

circumvent bans are stronger, private sector actors devote more resources to circumvention—an activity that does not

produce any socially valuable good or service—and therefore efficiency is negatively affected.

Depending on the domestic legal framework, the type of regulation involved, and the nature of the “product” (such

as unbacked tokens or stablecoins), the relevant authorities could include banking regulators, payment system

regulators, securities regulators, financial intelligence center authorities, or tax authorities.

In October 2022, the FSB published proposed frameworks for the international regulation of crypto-asset

activities. Further, the BCBS, CPMI and IOSCO, and FATF have provided guidance on the application of existing and

new standards to crypto-assets.

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24 INTERNATIONAL MONETARY FUND

Box 3. The Rationale for Comprehensive Regulations (concluded)

Crypto assets that escape bans may generate additional negative externalities (e.g., more crypto asset activity

may become linked to the dark web). Moreover, once crypto assets migrate to illegal markets, the ability of

targeted regulation to shape their characteristics and guide the types of innovation that occur is lost. Innovation is

path dependent, and thus regulations that affect current features can have important long-run effects.

Targeted restriction could be justified to manage specific risks. Where countries experience large capital

outflows, significant currency substitution, an unacceptable level of ML/TF risk, and/or risks to consumers and

markets, targeted restrictions might be useful. These restrictions might be targeted to certain products (e.g.,

privacy tokens), activities (e.g., payments in Ukraine), financial promotions (e.g., in Singapore, Spain, U.K.), or

products (e.g., crypto derivatives in Japan and the U.K.). Additionally, broader bans could be considered but only

over a shorter time horizon. Also, targeted restrictions might be warranted in the short run while countries

increase internal capacity (including knowledge and awareness) in anticipation of regulation.

Even when a temporary imposition of restrictions is contemplated, such restrictions should be considered

as part of a larger policy framework. Restrictions should not substitute for robust macroeconomic policies and

credible institutional frameworks, which are the first line of defense against the macroeconomic and financial risks

posed by crypto assets.

____________________

Internalities are the costs, often long-term, that an individual may incur as a result of their actions, which are not taken into account by

the individual when deciding to take those actions (Reimer and Houmanfar 2017

49. Conduct requirements should focus on points that are likely to have a direct impact on

end users. This is particularly important for key entities, such as exchanges and wallet providers,

issuers (where known), governance bodies (where applicable), and regulated financial institutions

that participate in crypto asset markets. For example, the administration of wallets must be secure

and have clear risk management frameworks. Safekeeping and segregating funds legally and

operationally, as well as safeguarding them through, for example, private insurance against cyber

risks and other threats, can support consumer protection in stressed market periods. Effective wind-

down frameworks where a wallet fails can help manage risks to end users. Exchanges might be

required to consider suitability requirements for users, while user education is also an important

short-term tool for regulators to protect consumers. Authorities should consider what market abuse

rules and surveillance mechanisms should be in place to adequately protect users.

50. Appropriate disclosure and transparency requirements are key. Marketing information

should be clear, balanced, and indicate if products are regulated in the local market. White papers

form an important part of the disclosure process. They should provide markets and users with clear,

accurate, and understandable explanations of the crypto assets issued and other essential

information such as key personnel (the importance of which surfaced in the case of FTX and its

Alameda Research affiliate). Entities should be transparent about the activities they are carrying out,

as well as key operational functions that might impact markets and consumers. In many cases, third

party audits can ensure that disclosure is accurate. Regulations should grant the power to establish

the scope of external audits and the standards to be followed in performing such audits.

51. When crypto asset service providers provide several core functions, authorities should

regulate them based on the risks generated by the entity as a whole and across all of its

activities. Conflicts of interest should be addressed where entities carry out several activities within a

single group. Additional prudential, conduct, and payment system regulations should reflect the

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 25

nature of all risks. Depending on the scope of the activities provided, a regulator or supervisor may

establish requirements for crypto asset service providers offering infrastructure-like services such as

clearing and settlement. For example, FTX had close financial interlinkages with its affiliates and

offered a wide range of services, resulting in conflicts of interest. For further discussion of the FTX

case see Annex 3.

52. If designated as systemic, crypto asset service providers should be subject to additional

oversight requirements and adhere to the PFMI when they perform payment functions.

Designation of a crypto service provider as systemic is at the discretion of authorities whenever

certain criteria are met. For financial market infrastructures (FMIs), the key factor is the potential of an

FMI to trigger systemic disruptions.

For stablecoin arrangements, for example, systemic importance

can be determined by domestic regulators based on such factors as size of the stablecoin

arrangement (in terms of number of users and value/volume of transactions), nature and risk profile

of the stablecoin arrangements’ activity, interconnectedness and interdependencies with the real

economy and financial system, and availability of alternatives to using the stablecoin arrangement as

a means of payment or settlement for time-critical services.

The process of identification and

designation of crypto service providers as systemically important can be complex, as factors should

be viewed holistically by domestic regulators.

53. Authorities should address risks from outsourcing to third parties, including

operational failures and cyber incidents. Many authorities require that wallet providers ensure a

robust cybersecurity framework to keep custodied crypto assets safe. It is important that key entities

that provide core functions have effective incident management procedures in place, including the

ability to detect and classify major operational and security incidents. Reporting operational or cyber

incidents needs to be timely and accurate to ensure market integrity. Where cyber or operational

processes are delegated to third parties, the wallet provider should be responsible for the incidents

that occur in the third parties, with clear outsourcing requirements in place. The BCBS Principles on

Operational Resilience could usefully be applied to key crypto asset service providers, particularly

exchanges and wallets. For stablecoin arrangements that are identified as a systemically important

FMI, published guidance on cyber resilience for FMIs needs to be applied.

54. Requirements for stablecoins should be tailored to address risk across the entire

ecosystem. This includes, (i) issuance, redemption, and stabilizing mechanisms; (ii) the transfer

function; and (iii) access. Depending on the extent and interconnectedness of arrangements, key

components of the regulatory framework should be focused on stablecoins’ reserve assets and

capital to address credit, market, operational, liquidity, concentration risks, and the rights of

More specifically, the PFMI specify that a payment system could be determined as systemic if it is the sole payment

system in a country (or the principal system in terms of the aggregate value of payments); a system that mainly

handles time-critical, high-value payments; and a system that settles payments used to effect settlement in other

systemically important FMIs.

See guidance on the Application of the Principles for Financial Market Infrastructures to Stablecoin Arrangements

(section 2), issued jointly by IOSCO and the Bank for International Settlements’ Committee of Payments and Market

Infrastructures.

See guidance on Cyber Resilience for Financial Market Infrastructures, issued jointly by IOSCO and the Bank for

International Settlements’ Committee of Payments and Market Infrastructures.

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26 INTERNATIONAL MONETARY FUND

stablecoin users over such reserve assets. In addition, the regulatory framework can take cues from

similar products and business in the market, such as commercial banking, e-money, FMIs, and money

market funds, while addressing novel risks. A regulatory approach that combines conduct, payment,

and prudential regulation, and models it on similar products and activities in the market, may be a

sensible approach.

55. Clear and robust governance requirements are essential, especially for stablecoin

arrangements. Governance should cover “fit and proper” senior management, resources and control

functions, and identifiable decision-making structures that promote safety and efficiency of the

arrangement. For example, in case of FTX, the governance framework and its interconnectedness

with other affiliates was opaque. Where redemption depends on third parties, the governance body

of the arrangement must have clear plans to ensure redeemability in case of failure of the third

parties. When stablecoin issuers are non-banks and engage with lending services, conflict of interests

should be carefully managed or otherwise prohibited. Third party audits of reserves should be

mandatory to show proof of reserves.

56. Where stablecoin arrangements become systemically important, authorities should

analyze and adjust the regulatory framework to address new risks.

Authorities should apply

requirements comparable to those applicable to systemically important banks, such as more

intensive supervision, safety and soundness measures, stress testing, recovery planning, and

resolvability, to stablecoin providers, taking into account differences in business models (especially

where stablecoins do not offer maturity transformation). Access to the financial safety net could be

considered when stablecoins reach a systemic scale and when commercial banks issue their own

stablecoins or tokenize their deposits, subject to safeguards.

57. Authorities should provide clear prudential requirements on regulated financial

institutions (such as banks and insurers) concerning their exposure to, and engagement with,

crypto assets. For example, banking, securities, insurance, and pensions regulators should stipulate

capital and liquidity requirements and limits on exposures. Financial institutions should also monitor

their indirect exposures. This could be, for instance, through loans to crypto users, derivative

exposures with crypto asset exchanges, and cyber insurance to wallet providers. While such risks

brought by indirect exposures are not the same as from direct exposures, they can be strongly

correlated with market movement.

Financial Integrity

58. To address financial integrity risks, countries should implement the FATF standards on

AML/CFT. The standards explicitly address crypto assets, which they refer to as virtual assets (VA).

They notably require countries to identify and assess the ML/TF risks associated with VAs and take

appropriate steps to manage and mitigate those risks. This means ensuring that (i) the relevant laws,

including criminal laws, cover VAs; (ii) the relevant authorities have the necessary powers to pursue

potential crimes involving VAs, sanction the perpetrators, and freeze, seize, and confiscate VAs when

warranted; (iii) unless they are banned, the VA-related services listed in the FATF standards are

This includes contagion risks arising from stablecoin activities to other parts of the financial sector.

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regulated and their providers are subject to AML/CFT obligations (including customer due diligence,

transaction monitoring, and reporting of suspicious transactions) and supervised for AML/CFT

purposes; and (iv) all stakeholders (e.g., AML/CFT supervisors, law enforcement agencies, and the

private sector) work in a coordinated manner. Authorities may prohibit the listing of certain types of

crypto assets, such as those that use technology to completely mask any form of user identification.

59. Countries need to monitor and mitigate the ML/TF risks related to decentralized

finance (DeFi) projects and peer-to-peer (P2P) transactions. P2P transactions do not involve

intermediaries or other AML/CFT obliged entities. Likewise, an intermediary may not be present or

may be difficult to identify in the context of DeFi. In these contexts, the lack of intermediaries means

that traditional AML/CFT regulation, in which AML/CFT requirements are imposed on the private

sector and compliance is monitored by supervisors, cannot be applied. The potentially substantial

volume of P2P transactions and the rise of DeFi calls for creative risk mitigation.

51,52

To address these

issues, countries may consider measures such as requiring intermediaries to apply enhanced

AML/CFT measures when dealing with unhosted wallets, and identifying intermediaries in the DeFi

context that can be regulated and held accountable for AML/CFT controls.

Continual monitoring of

P2P transactions and the DeFi space by countries and the FATF is needed to ensure that the

associated risks are adequately mitigated and that guidance is provided as appropriate.

60. If properly used, digital tools can help improve the effectiveness of AML/CFT measures

taken by the public and private sectors, but they are not silver bullets. When relying upon

proper technology, and adequate governance, processes, and procedures, new solutions such as

digital ID can facilitate the implementation of effective AML/CFT controls. Likewise, blockchain-based

regtech and suptech can greatly help the private sector and the authorities to trace flows and detect

suspicious transactions. However, there are important limitations to this approach. For example, off-

chain transactions might not be traceable, and the use of anonymity enhancing features or

mechanisms to hide critical information will significantly hinder the ability to implement certain

measures that address financial integrity risks (such as customer due diligence).

The FATF found that a significant amount of certain crypto assets is transferred on a P2P basis and the proportion

has remained largely stable between 2016 and 2020.

One study suggests that in 2021, more VA was stolen from DeFi protocols than any other type of platform, and that

centralized exchanges decreased in popularity as a destination for stolen funds. This is likely due to AML/CFT

procedures adopted by major exchanges.

DeFi platforms are not always as fully decentralized as they claim to be. There may be some parties such as

creators, owners, operators, or other persons who maintain control, or have sufficient influence, in the DeFi

arrangement and therefore are qualified as VA service providers subject to AML/CFT regulation. The FATF has also

recommended that in cases where there is no intermediary, countries may consider requiring the involvement of a

regulated intermediary in activities related to the DeFi arrangements. Nonetheless, oversight of DeFi platforms is still

very limited in practice.

Examples of anonymity enhancers include mixers and multiple layers of encryption, stealth addresses, and ring

signatures. Hidden critical information may include the location of the customer or the counterparty, or the value of

the transaction.

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28 INTERNATIONAL MONETARY FUND

F. Element 6: Establish a Joint Monitoring Framework Across Different

Agencies and Authorities

61. Establishing joint monitoring between authorities may be a good first step to better

understand developments in the crypto ecosystem. Whilst comprehensive regulation is the first

best option, unique jurisdictional challenges may warrant a “constrained best solution” (Box 4

highlights implementation challenges). Irrespective of approach, authorities with different mandates

may all equally have interest in developing a deeper understanding of crypto developments. Existing

regulatory and supervisory framework (e.g., for AML/CFT purposes), if any, remain an important

mechanism to aid understanding of crypto asset activities in a jurisdiction and can help obtain

information useful for other regulatory purposes. In addition, frequent engagements with the crypto

industry to understand the different actors and their emerging activities could help authorities grasp

the extent of developments. Innovation hubs and regulatory sandboxes have been deployed by

many countries to understand the innovation, risks, actors, and use cases involved.

Box 4. Potential Implementation Challenges

Authorities will face practical challenges during implementation of recommendations. Countries face

several constraints, and it may not be feasible to implement all recommendations comprehensively and

immediately. The main constraints include:

• Lack of sufficient and appropriate resources: Many authorities are experiencing a shortage of

resources and expertise. Authorities need to choose and allocate these scarce resources to areas with

highest priority or highest risk. For instance, the effective implementation of the FATF standards on AML/CFT

requires a sound assessment and understanding of the ML/TF risks associated with crypto assets, which in

many instances remains limited and underdeveloped, sometimes due to resource shortages. Authorities

should consider implementing some elements with higher importance, including those with fiscal impact,

and defer implementing others.

• Lack of data: Due to a lack of comprehensive and comparable data, most authorities struggle to

accurately assess the scale and types of risks posed by the misuse of crypto assets, and to identify

appropriate regulatory responses. Furthermore, differences in taxonomies can hinder data comparisons

across jurisdictions.

• Fragmented implementation: While standard setting bodies are developing recommendations,

guidance, and standards in relation to crypto assets, a lack of a common taxonomy can limit the timeliness

of implementation. Also, as evidenced from the implementation of the FATF standard on AML/CFT, the

speed and level of implementation can differ across jurisdictions, creating opportunities for regulatory

arbitrage. Furthermore, some global standards are tailored toward advanced economies and might not

reflect the challenges facing emerging and developing countries (such as risks of cryptoization).

Box 4. Potential Implementation Challenges (concluded)

• Cross-border nature: Many crypto asset service providers are located in offshore jurisdictions with

limited capacity or history of international cooperation. However, these crypto asset service providers market

their services globally, providing significant challenge to the authorities where the users are located, with

possible scope for tax avoidance or evasion. This presents a major obstacle to effect regulations. Some

jurisdictions require onshoring of these entities to subject them to regulation, but this can be challenging

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INTERNATIONAL MONETARY FUND 29

and difficult to enforce. Others are creating public communication channels to ensure the public is aware of

which entities are licensed domestically and which are unlicensed and foreign. This helps to inform the

public about the lack of recourse to compensation when dealing with foreign crypto entities. Fostering

collaboration on cross-border sharing is also critical for tax compliance.

• Legal challenges: A critical challenge when adopting legal reforms is maintaining a level of flexibility to

allow for the rapidly evolving technology in the crypto ecosystems, while still providing sufficient legal

certainty.

• Challenges with novelty: Some requirements may be difficult to implement. For instance, the so-called

Travel Rule

in the FATF Standards on AML/CFT raises implementation challenges that require greater

technological knowhow and collaboration to be overcome.

Authorities should implement the necessary elements in a pragmatic manner, taking into account

jurisdictional contexts and idiosyncratic constraints. Authorities face various constraints and need to

explore a “constrained best solution.” In most instances, the constrained best solution is likely to be national

frameworks that are guided by global standards and best practices, supplemented by a mix of targeted

restrictions where global standards have not been completed and supervisory capacity is lacking. Public

communication and other soft measures can help supplement and fill outstanding gaps.

Authorities that are faced with rapid uptake of crypto assets may prioritize select elements. The nine

elements work together to create a holistic framework, but some may be more important than others

depending on the rate of adoption. A starting point is establishing legal certainty within both private and

public law. Following legal clarification, comprehensive and consistent regulations are preferable, but under

specific circumstances, targeted restrictions may be considered as an alternative (as discussed in Box 3).

____________________

FATF’s Travel Rule requires crypto asset service providers and other financial institutions to share relevant originator and

beneficiary information alongside virtual asset transactions, therefore helping to prevent criminal and terrorist misuse.

62. Authorities should also collaborate on data collection and analysis to improve

monitoring capacities. Consistent and reliable data are important for monitoring and enforcement.

The fragmented approach to categorizing crypto assets can inhibit the reliability and availability of

data. The FSB and other standard setters are well placed to develop common global taxonomies. At

present, the reporting of crypto asset data is largely limited to voluntary reporting or reporting under

AML/CFT frameworks. Gaps in reporting exist, including off-chain transaction data from the entities

that perform critical functions, such as crypto asset service providers. Some authorities are beginning

to work with blockchain analytics firms to better understand the flow of funds through a crypto asset

value chain, and where significant limitations exist (for example, off-chain data collection and the use

of virtual private networks).

Finally, data collection should be made more consistent across borders,

and collected data should be shared among relevant home and host authorities.

63. To support consistent recording in macroeconomic statistics across economies, there is

a need to develop a data collection framework. Work is ongoing on the development of a

statistical methodology on the recording of crypto assets in macroeconomic statistics, in the context

In addition, some organizations are exploring concepts of embedded supervision (i.e., suptech) that enable

authorities to directly interact with distributed networks. This will improve access to data and allow authorities to

monitor compliance in real time by viewing blockchain transaction data.

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30 INTERNATIONAL MONETARY FUND

of the ongoing update of international statistical standards.

Also, the new G20 Data Gaps Initiative,

recently welcomed by the G20 leaders,

includes a recommendation for the development of a data

collection framework for crypto assets.

G. Element 7: Establish International Collaborative Arrangements to

Enhance Supervision and Enforcement of Crypto Asset Regulations

64. The borderless nature of the crypto-assets ecosystem limits the effectiveness of

national approaches to regulation. For instance, crypto asset service providers have incentives to

transactions to a global market (e.g., FTX was domiciled in The Bahamas but offered crypto related

services across the globe). Jurisdictions wishing to regulate crypto services may not have sufficient

information or powers to enforce restrictions and need to cooperate with crypto exchanges’ home

regulators. International collaboration and information sharing are required to minimize regulatory

arbitrage and ensure the continued effectiveness of regulatory policies. A comprehensive, consistent,

and coordinated regulatory approach to crypto assets is a prerequisite for effective international

collaboration, but it may not be sufficient.

65. Mechanisms need to be developed for domestic authorities to authorize and regulate

crypto service providers legally domiciled in foreign jurisdictions. Under the FATF

recommendations, virtual asset service providers (VASPs)

should be registered or licensed at least

in the jurisdiction where they are created (as legal persons) or where the place of business is located

(for natural persons) and supervised for AML/CFT purposes. The borderless nature of crypto assets

means that customers in a given country can easily access services of a service provider not

authorized by that country. Countries may, therefore, need to develop ways to authorize and

regulate providers that offer services in their jurisdiction, even if the providers are legally domiciled

elsewhere. Enforcement, however, may be challenging for regulators with capacity or technological

constraints.

66. Furthermore, a clear legal basis must underpin the exchange of information and

cooperation, including between AML/CFT competent authorities, even for countries that have

restricted or banned virtual asset-related activities. Given that specific VASPs may be subject to

the AML/CFT framework of multiple jurisdictions, cooperation between AML/CFT supervisors is

critical, and establishing AML/CFT supervisory colleges can facilitate the information sharing and

exchange of views among supervisors of VASPs operating in multiple jurisdictions. Sharing of

See Guidance Note F.18 on The Recording of Crypto Assets in Macroeconomic Statistics.

See IMF Press Release No. 22/410.

The FATF defines VASPs as “any natural or legal person who is not covered elsewhere under the Recommendations,

and as a business conduct one or more of the following activities or operations for or on behalf of another natural or

legal person: i. exchange between virtual assets and fiat currencies; ii. exchange between one or more forms of virtual

assets; iii. transfer of virtual assets; iv. safekeeping and/or administration of virtual assets or instruments enabling

control over virtual assets; and v. participation in and provision of financial services related to an issuer’s offer and/or

sale of a virtual asset.” It defines a virtual asset as “a digital representation of value that can be digitally traded, or

transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations

of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF

Recommendations.”

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information and knowledge among countries is critical for improving understanding of ML/TF risks

related to crypto assets at the global and country levels. Many countries have not yet implemented

the FATF standards related to crypto assets, and amongst those that have, many are struggling to

implement them effectively. The uneven and inconsistent implementation creates opportunities for

regulatory arbitrage as well as challenges in the implementation of certain requirements, such as

those governing the transfer of virtual assets.

Considerably more efforts are needed globally to

implement the FATF standards effectively.

67. International collaborative arrangements should be adapted for crypto assets. Existing

cooperation protocols among regulatory authorities in different jurisdictions—such as bilateral

memoranda of understanding (MoUs), multilateral MoUs, and supervisory colleges for systemically

important financial institutions—are well established and should be expanded to cover the crypto

ecosystem. To better understand cross-border risks and find common solutions, new supervisory

colleges can be created where an entity wants to launch a potentially globally systemic crypto

service.

H. Element 8: Monitor the Impact of Crypto Assets on the Stability of the

International Monetary System

68. Policymakers need to step up to the challenges and opportunities posed by crypto

assets in the complex global environment. Central bankers, regulators, and other policymakers can

help ensure a strong international monetary system by taking decisive action to renew commitments

to international cooperation and multilateralism, and reinforce progress made in integrating the

global economy.

69. To ensure the success of this upgraded effort, it is essential to continuously monitor

the impact of crypto assets on the international monetary system. The international monetary

system (IMS) may be entering a chapter with major challenges, such as excessive fragmentation,

large and volatile capital flows, and new risks to financial stability and integrity. Crypto assets could

amplify existing vulnerabilities and pose new risks to global financial stability and the IMS on

multiple fronts. The areas that need close and ongoing monitoring include: (i) crypto assets’ impacts

on gross and net cross-border capital flows; (ii) changes in financial intermediation, currency

substitution, and international currency use; (iii) effects of exchange rate and capital account regimes

as well as capital flow management measures; (iv) financial integrity risks; and (v) demand for and

supply of Global Financial Safety Net resources. The close monitoring will help inform appropriate

regulation and cross-border cooperation among policymakers and international standard setting

bodies and institutions.

Preventing and detecting ML/TF requires VASPs to know the originator and beneficiary of transactions. To ensure

compliance with regulatory requirements, certain information, such as the identities of both parties involved, must be

transmitted along with the VA in a manner similar to how it is conveyed in a bank wire transfer. This practice, known

as the "travel rule," must be adapted to suit the specific characteristics of VA transactions. When transferring VAs,

VASPs must therefore obtain, hold, and transmit required originator and beneficiary information.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

32 INTERNATIONAL MONETARY FUND

70. The IMF will help by monitoring macrofinancial and spillover risks. The IMF can do so by

actively engaging with member countries through surveillance, lending facilities, and capacity

development support. The IMF, with its worldwide membership and technical assistance, can also

help bridge the digital divide by supporting countries with their technical challenges.

I. Element 9: Strengthen Global Cooperation to Develop Digital

Infrastructure and Alternative Solutions for Cross-Border Payments and

Finance

71. In addition to putting in place an effective policy framework for crypto assets, the

public sector should take advantage of progress in digital technology to enhance public policy

objectives. Some of the underlying technologies of crypto assets could be used to facilitate the

development of digital infrastructures and address existing inefficiencies in financial services. Digital

public infrastructure, such as interoperable digital platforms, digital identification systems, digital

payments, and trusted data sharing, can help solve problems, such as persistent inefficiencies in

cross-border payments.

72. Cross-border payments often face a range of inefficiencies, including high fees, slow

transaction times, lack of transparency, and limited accessibility for some individuals or

businesses. In response, G20 finance ministers and central bank governors endorsed a “roadmap” in

October 2020 to enhance cross-border payments (FSB 2020). The roadmap splits necessary

improvements into 19 building blocks (BBs) that the IMF and other institutions are actively

developing. In particular, the last three BBs are aimed at “exploring the potential role of new

payment infrastructures and arrangements,” including considering the feasibility of new multilateral

platforms and arrangements for cross-border payments (BB17), fostering the soundness of global

stablecoin arrangements for cross-border payments (BB18), and factoring an international dimension

into central bank digital currency design (BB19).

73. The policy framework proposed in this paper can help create the conditions to improve

cross-border payments. It sets out the key elements for authorities to consider that create an

environment that allows for innovation in digital money while managing the risks. Of particular

importance are the macroeconomic, regulatory, and oversight requirements to ensure the safety of

the international monetary system. A consistent legal basis and coherent policies, including for fiscal,

monetary, and regulatory purposes, are also essential. Moreover, standards for technology

interoperability are necessary to allow for cross-border flows and to ensure sufficient competition.

Finally, policies must ensure that capital flow measures and the monitoring of capital flows remain

effective even when transactions shift to digital money.

74. But the public sector’s role can go beyond providing a robust policy framework. For

example, the public sector can build, operate, or supervise digital infrastructure to facilitate cross-

border payments. Although not exclusively the domain of the underlying technology of crypto

assets, tokenization, encryption, and programmability, new networks and platforms could improve

the efficiency of transactions (Adrian et al. 2022). As a final point, it is important to consider the

possibility that the public sector might issue central bank digital currency, utilizing technologies

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 33

developed by crypto asset programmers. While this could offer numerous benefits, it also raises a

range of complex policy and technical issues that are beyond the scope of this paper.

CONCLUSION

75. The paper proposes nine elements along three dimensions that inform a

comprehensive, consistent, and coordinated policy framework for crypto assets. This

framework will serve as the foundation for staff's efforts to provide policy advice and capacity

development to country authorities, as well as their participation in discussions at the standard

setting bodies.

76. The first dimension of the framework raises the importance of macro-financial

considerations, including monetary, capital flow management, and fiscal. Where widely

adopted, crypto assets could instigate currency substitution. The first line of defense is ensuring

sound and effective monetary and fiscal policy, and not declaring privately issued crypto assets as

national currency.

77. The second dimension lays a path to establishing domestic regulatory, supervisory, and

oversight requirements, and the effective implementation of existing standards (e.g., the FATF

standards on AML/CFT). A starting point is establishing legal certainty within both private and public

law. Once legal clarity has been established, it is generally best to implement comprehensive and

consistent regulations. In certain circumstances, targeted restrictions may also be necessary to

address specific risks or challenges that cannot be effectively addressed through more general

regulations. In line with developing comprehensive regulations, the paper provides a set of

recommendations on the prudential, conduct and oversight requirements. Developing consistent

domestic approaches is important to avoid duplication and prevent arbitrage.

78. The third dimension addresses the criticality of global coordination, recognizing the

extra-territorial nature of crypto assets, but also the potential for technological innovations to

be leveraged for public policy purposes. Global coordination, monitoring the impact on the

international monetary system, and developing alternatives for cross-border payments are

highlighted as priorities. The public sector should play a strong catalyst role in leveraging emerging

technologies to foster the improvement in cross-border payments.

79. Finally, the paper acknowledges the heterogeneity across jurisdictions, including

different initial conditions and constraints. A “constrained best solution” and pragmatic approach

to regulation is recommended. Country circumstances and capacity constraints may affect the pace

and the sequence of implementation. Moreover, regulations and broader policies toward crypto

assets will not fix any underlying design flaws such as the lack of a credible nominal anchor,

payments finality, or scalability.

ISSUES FOR DISCUSSION

• Do Directors agree with the purported benefits and potential risks described in paragraphs 9–32?

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

34 INTERNATIONAL MONETARY FUND

• Do Directors agree with staff’s proposal on nine elements to inform a comprehensive, consistent,

and coordinated policy framework for crypto assets?

• Do Directors agree that this framework should be used to guide staff’s policy dialogue with

country authorities and capacity development activities, and participation in discussions with

standard-setting organizations?

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 35

Annex I. Classification of the Crypto Asset Ecosystem

CRYPTO ASSETS

UNBACKED TOKENS STABLECOINS

OTHER

Characteristic

Includes algorithmic

stablecoins

Utility tokens Security tokens

Privately issued?

Deployed on

distributed ledger

technology?

Pseudonymous?

√

√ √

Centralized (known

issuer) or decentralized

issuance?

Usually decentralized

Centralized or

decentralized

Usually centralized Usually centralized

Claim or no claim on

the issuer?

No claim Depends on design

Depends on design Depends on design

Redemption pledge (at

face value)?

None

Fixed/variable

None

None (equity instruments)

Fixed (debt instruments)

Backed assets? No backing assets Safe or varied

Collateralized (off chain)

assets (e.g., fiat,

commodity, commercial

paper) or

uncollateralized but

could be backed (on

chain crypto assets)

N/A Can represent real world

securities

Stable or volatile price?

Volatile

Dampened price

volatility

(fluctuates around peg;

de-pegs likely)

N/A N/A

Not all stablecoins are pseudonymous.

May differ on case-by-case basis.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

36 INTERNATIONAL MONETARY FUND

Use cases?

Speculation

Remittances

Potential usage as a

payment instrument

Access to crypto

ecosystem, including

other crypto assets and

DeFi

USD-denominated

stablecoins might be

used as a hedge against

inflation or store of value

in some EMDEs

Potential use as a

payment instrument

Loyalty programs, access

to pre-launch discounts,

Tokenized equities,

fractionalized non-

fungible tokens, initial

coin offerings

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

INTERNATIONAL MONETARY FUND 37

Annex II. Crypto Asset Standards and Guidance by Standard-

Setting Bodies

• Basel Committee on Banking Supervision (BCBS): In December 2022, the BCBS finalized its

standard on prudential treatment of crypto assets, which was endorsed by the Committee’s

oversight body, the Group of Governors and Heads of Supervision. This included the final

standard that the Committee agreed to implement by January 1, 2025. The proposed standard

reflects the high-risk of some crypto assets, while taking a more proportional and technology

neutral approach to those which are anchored on real-world assets. The BCBS proposed splitting

crypto assets into two categories: lower-risk anchored crypto assets and higher-risk ”traditional”

crypto assets, like Bitcoin. The first category was further distinguished between tokenized assets

and stablecoins. Credit and market risk capital requirements for tokenized assets would be

similar to those of traditional assets. For stablecoins, the proposal considered a possible lower

risk weight based on certain conditions. For traditional crypto assets—which include unbacked

crypto assets—the BCBS proposed a conservative prudential treatment based on a 1250 percent

risk weight that would be applied to maximum long and short positions.

• Committee on Payments and Market Infrastructures (CPMI): In 2022, the CPMI and IOSCO

published a guidance note

on the application of the Principles for Financial Market

Infrastructures to stablecoin arrangements (SAs). The PFMI is particularly relevant for stablecoin

arrangements primarily used for payment purposes, as it would help ensure the safety, efficiency

and resilience of these infrastructures. The guidance defines the SA’s transfer function as the

transfer of coins between users, and typically entails the operation of a system, a set of rules for

the transfer of coins between or among participants, and a mechanism for validating transactions

(similar as for other FMIs). The guidance aims to provide more clarity on a subset of principles

(i.e., governance, framework for the comprehensive management of risks, settlement finality, and

money settlements) but SAs will be expected to observe all of the relevant principles. Further

work is expected on issues specific to stablecoins denominated in or pegged to a basket of fiat

currencies (i.e., multicurrency SAs) and stablecoins with non-cash reserve assets as well as the

PFMI Responsibilities.

• Financial Action Task Force (FATF): In 2018, the FATF defined virtual assets (VAs) and virtual

assets service providers (VASPs). The entire FATF standards apply to activities involving VAs, but

in 2018 and 2019, several provisions were introduced specifically to address VAs and VASPs,

including the FATF Glossary, Recommendation 15 on "New Technologies," and its Interpretive

Note. To facilitate implementation, the FATF also issued an

Updated Guidance for a Risk-Based

Approach for Virtual Assets and Virtual Asset Service Providers.

• Financial Stability Board (FSB): In October 2020, the FSB published high-level

recommendations to promote coordinated and effective regulation, supervision, and oversight of

global stablecoin arrangements. In February 2022, the FSB published an assessment of risks to

financial stability posed by crypto assets. While the FSB concluded that crypto assets are not

globally systemic, they noted that stablecoins in particular may have the potential to be systemic

in the future. In October 2022, the FSB revised their high-level recommendations on global

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

38 INTERNATIONAL MONETARY FUND

stablecoins to reflect new products and trends in the market. They also consulted on high-level

recommendations on the regulation, supervision, and oversight of broader crypto asset activities

and markets. In comparison to the Fund’s proposed elements of an Effective Policy Framework,

the FSB high-level recommendations on the

Regulation, Supervision and Oversight of “Global

Stablecoin” Arrangements do not address macro-financial considerations.

• International Organization of Securities Commissions (IOSCO): In February 2020, IOSCO

published its final report

on issues, risks, and regulatory considerations relating to crypto asset

exchanges. When building a regulatory framework for crypto asset platforms, the IOSCO report

sets out that authorities should consider the following elements: (i) governance requirements for

platform operators, including prudential requirements; (ii) requirements regarding access to the

platform; (iii) requirements for the robustness, resiliency, and integrity of operating systems; (iv)

market integrity requirements; (v) transparency requirements; (vi) AML/CFT requirements; and

(vii) criteria to accept products to be offered in the platforms. In 2022, IOSCO published a fact-

finding report on key risks and considerations on

DeFi.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

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Annex III. The FTX Debacle: Strengthening the Case for Consistent

and Comprehensive Regulation

FTX, a major crypto exchange once valued at $32 billion, filed for bankruptcy protection on

November 11, 2022. Although contagion to the wider financial system appeared to be limited, the run on

FTX exerted significant spillover effects on major crypto assets and impacted decentralized finance and

stablecoin markets. The prices of Bitcoin and Ether dropped 23 and 43 percent respectively and the total

value locked (TVL) of DeFi dropped by around 17 percent to 45 billion.

The FTX debacle highlights several vulnerabilities arising from the provision of multiple crypto asset

activities:

• First, the lack of basic information of crypto exchanges, such as the corporate structure and financial

information (for example the composition of reserves including exposure to self-issued tokens), makes it

difficult to assess the extent of interconnections, as well as the robustness of governance and risk

management arrangements.

• Second, the nature and magnitude of financial interlinkages between affiliates were opaque. Intra-group

transactions were significant—FTX reportedly lent more than half of its customer funds to fund risky

investments by its trading arm, Alameda Research, which in turn held a significant value in claims on FTX

through its holdings of the unbacked self-issued token, FTT. Financial interconnectedness on such scale

points to severe governance and risk management failures, as well as consumer protection concerns.

• Third, the multiple functions and activities (such as brokerage, trading, and custody services) of crypto

service providers are not subject to regulation and oversight. In the case of FTX, these integrated

offerings led to leveraged lending to consumers, creating liquidity mismatches, and the subsequent

inability to fulfill higher demands for withdrawals.

• Fourth, crypto asset providers and their affiliates are often domiciled in multiple jurisdictions with

different reporting requirements (where applicable). These disparate reporting requirements compounds

the opacity and increases the lack of transparency of providers activities.

The recommendations of this paper should help address similar vulnerabilities in the crypto

ecosystems. The recommendations emphasize in particular the importance of transparent and robust

governance and risk management frameworks; the criticality of segregation of customers’ assets; in the case

of integration of trading, storage, and brokerage services, the importance of each activity to have clear and

distinct regulatory requirements; greater transparency and disclosure requirements, and the importance of

independent third-party audits.

ELEMENTS OF EFFECTIVE POLICIES FOR CRYPTO ASSETS

40 INTERNATIONAL MONETARY FUND

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