The cryptocurrency ecosystem has found an unexpected backer in the International Monetary Fund. The organization is asking the world’s central banks to be open-minded about digital money as they should “distinguish between real threats and needless fears”.

IMF Wants to Help Develop Cryptocurrency Regulation

Christine Lagarde, Managing Director of the International Monetary Fund, took many in the financial system by surprise with a recent blog post where she seems to be on the side of cryptocurrencies when it comes to the recent overreaction by some central banks, including India and Pakistan. The IMF wants to offer its 189 members advice and serve as a forum for discussion and collaboration in the development of a consistent regulatory approach;

“Policymakers should keep an open mind and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit”

With over 1,500 different digital coins and tokens in circulation, financial regulators feel pressured to allow the blockchain technology to develop while being threatened by cryptocurrency trading without the oversight of a central monetary authority. The IMF’s annual spring meeting in Washington is this week included the hot topic for this year – the cryptocurrency market.

According to Coinmarketcap, the total market cap among the 1568 cryptocurrencies spread in 10327 markets is over $300 billion, which is about 4.8 percent of the world’s foreign exchange reserves.

Last week, IMF’s Lagarde told Hong Kong’s South China Morning Post that the industry is something which is developing fast, is highly volatile, with benefits and downsides.

“Firstly, the illicit use of digital currency plus abuse of consumers’ financial illiteracy must be guarded against. Secondly, innovations from the use of digital mechanisms need to be explored and encouraged. So it’s a combination of having a framework that protects, and not stifling innovation, that can lead to cost efficiency.”

A preliminary assessment made by the IMF concluded that while assets tied to cryptocurrencies don’t pose an immediate danger to the global financial system because their footprint is still small, they have the potential to magnify the risks and increase the transmission of economic shocks. On the other hand, they can “enable fast and inexpensive financial transactions” and the distributed ledger technology could improve efficiencies.

“We need to remain alert and vigilant. We must act quickly to close the knowledge gaps that inhibit the effective monitoring of crypto-assets. There should be systemic risk assessment and timely policy responses, as well as measures to protect consumers, investors, and market integrity”, Lagarde added.

This week, the IMF Innovation Lab is holding sessions on distributed ledger technology, successful applications of the blockchain, and the risks and opportunities of cryptocurrencies.

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