Last month, the managing director of the International Monetary Fund (IMF), Christine Lagarde, in her post for the IMF blog, talked about the illicit side of crypto assets and how technology could be used to combat criminal activity in the crypto world. In order to help regulators get a more balanced view (or see the other side of the virtual coin, so to speak), for this month's article, Ms. Lagarde decided to examine some of the potential benefits of crypto assets; she explained that it was important to have a balanced view and not to fall into the “crypto-condemnation” or the “crypto-euphoria” traps.
Her main message to policymakers was as follows:
… crypto-assets… could have a significant impact on how we save, invest and pay our bills. That is why 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.
Potential Benefits of Crypto Assets
Here is how the managing director the IMF outlined the benefits of crypto assets.
First, she pointed out that crypto assets allow for fast and inexpensive transactions. She mentioned that some “payment services now make overseas transfers in a matter of hours, not days”. However, many crypto assets make allow cross-border crypto asset transfers from one wallet to another in a matter of minutes, if not seconds. She reassured central banks, just as she did at her speech at the Bank of England Conference in September 2017, that if “privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.”
Second, she said that the underlying technology of crypto assets — Distributed Ledger Technology (DLT) — creates new models of financial intermediation. To illustrate this idea, she referred to the system built (using DLT) by US FinTech company Digital Asset Holdings for the Australian Securities Exchange (ASX). According to ASX's CEO, Dominic Stevens, the new system, which manages the clearance and settlement of equities, will cut trading costs.
Third, she observed that DLT could be used for secure storage of important data, such as medical records or real estate ownership information.
Implications of Crypto Assets Usage on Financial Stability
Ms. Lagarde explained that although crypto assets do not pose an immediate danger due to their “small footprint and limited links to the rest of the financial system”, the business models of financial institutions would be challenged if virtual currencies became much more popular than fiat currencies. She went on to say that crypto asset technologies needed to be better understood in order to monitor them more effectively, that it was important to separate “real threats” from “needless fears”, and that it was important to “protect against risks wihout discouraging innovation.”
