IMF chief says cryptocurrency’s own blockchain technology could be used to control it

Christine Lagarde has called for a crackdown on bitcoin by using the technology behind the digital currency to “fight fire with fire”.

The head of the International Monetary Fund said authorities around the world could harness the potential of cryptocurrencies to help bring them under control, warning that failure to do so would allow the unfettered development of a “potentially major new vehicle for money laundering and the financing of terrorism”.



Writing in an IMF blogpost, Lagarde said the same innovations that powered cryptocurrencies could be used to help regulate them. “We can harness the potential of crypto-assets while ensuring that they never become a haven for illegal activity or a source of financial vulnerability.”



Distributed ledger technology, which enables the authentication of transactions without them needing to be administered or guaranteed by a central authority, could be used to speed up information sharing between regulators to improve their monitoring of the financial system.



She said the developments driving cryptocurrencies, including blockchain, were exciting advances which could help revolutionise financial services by providing low-cost payment methods for those who did not have bank accounts. However, she said, there was “peril that comes along with the promise”.



Lagarde is the latest senior financial figure to issue a warning over the potential dangers of bitcoin, as well as to hail the potential of the technology behind it.



Backers of bitcoin have said the technology has the potential to make everyday payments easier and cheaper. However, economists have said the digital currency represents a dangerous speculative bubble.



Lagarde said cryptocurrencies could cause new vulnerabilities to develop in the world’s financial system, illustrated by its rapid growth and volatile price swings. Bitcoin, the best known of thousands of digital currencies developed in recent years, gained in value by more than 900% last year to hit almost $20,000 (£14,400) a unit before Christmas, but has since crashed to less than half that. It was worth almost $9,300 in early trading on Tuesday.



Swings in value of anywhere up to 30% are common, raising the prospect of massive gains or losses for investors.



“It would not be wise to dismiss crypto-assets; we must welcome their potential but also recognise their risks,” Lagarde said.



Mark Carney, the governor of the Bank of England, said earlier this month that bitcoin faces a regulatory crackdown, but praised the technology’s potential. He said anarchy could not reign in cryptocurrency trading, and that the currencies had so far failed to fulfil their most basic function: as money.



The Bank will present a report to the G20 in Argentina this month, with Carney hinting at greater controls and detailing how the central bank has tested ways to use the technology in the British payments system. Carney has said, however, that it is unlikely at this stage that international action will be taken to regulate digital currencies, meaning the task will fall to individual countries.



Q&A What is bitcoin? Show Hide Bitcoin is the first, and the biggest, 'cryptocurrency' – a decentralised tradeable digital asset. The lack of any central authority oversight is one of the attraction. Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person. The exchange rate has been volatile, making it a risky investment. Whether it is a bad investment is yet to be seen. In practice it has been far more important for the dark economy than it has for most legitimate uses, but with Facebook's announcement that it is launching a new digital currency - Libra - mainstream interest in bitcoin has surged.



So far countries including China, Russia and South Korea have moved to introduce greater controls over the trading of digital currencies, often triggering sharp falls in their value. However, the G20 has put cryptocurrencies on the agenda for a November summit, which Lagarde suggested could lead to greater international collaboration.



She said cooperation between countries would be vital for staging an effective crackdown in future because cryptocurrencies have no borders.

She cited as an example of international coordination, the closure of the online criminal marketplace AlphaBay, which accepted cryptocurrency payments. Before the site was taken offline, more than $1bn had been exchanged through digital currencies, she said.

