financial stability

Economics Professor Warns ‘Cryptocurrencies May Contribute to Monetary and Financial Instability’

16/10/2021 by Idelto Editor

Cornell University’s professor of economics and former head of the IMF’s China division, Eswar Prasad, has warned that “Cryptocurrencies may contribute to monetary and financial instability.” He added that the risk is amplified if the industry is unregulated and lacks investor protection.

Economist Sees Crypto Posing Risks to Financial Stability

Eswar Prasad, the Nandlal P. Tolani Senior Professor of Trade Policy and professor of economics at the Charles H. Dyson School of Applied Economics and Management at Cornell University, shared his view on cryptocurrency in an interview with CNBC, published Wednesday.

Prasad is also a senior fellow at the Brookings Institution, where he holds the New Century Chair in International Economics, and a research associate at the National Bureau of Economic Research. He was previously chief of the Financial Studies Division in the research department of the International Monetary Fund (IMF) and head of the IMF’s China division.

He said:

Cryptocurrencies may contribute to monetary and financial instability, especially if they were to spawn a large and unregulated financial system that lacks investor protection.

His statement echoes a report recently published by the IMF cautioning that the rising popularity of cryptocurrency could pose a threat to financial stability. Moreover, the deputy governor of the Bank of England, Jon Cunliffe, said this week that regulation is urgently needed since the crypto industry is growing rapidly, and there are some “very good reasons” to think that it could pose risks to the country’s financial stability in the future, even though the risks are currently limited.

Professor Prasad was also asked how cryptocurrencies could widen economic inequality. “Cryptocurrencies and their underlying technology hold out the promise of democratizing finance by making digital payments and other financial products and services easily accessible to the masses,” he replied. “But because of existing inequalities in digital access and financial literacy, they could end up worsening inequality.”

In addition, he emphasized that “any financial risks arising from investing in cryptocurrencies and related products might end up falling especially heavily on naïve retail investors.”

The Cornell professor of economics also discussed central bank digital currencies (CBDCs), stating:

I think central bank digital currencies are the way of the future. But every central bank will want to make sure that its money is not used for illicit purposes, so transactions will be auditable and traceable.

However, Prasad noted that “if every payment you make, including for a cup of coffee or for a sandwich, can be seen by a government agency, that’s an uncomfortable proposition.” The economist concluded: “You could, in a more dystopian world, have the government deciding what sort of goods and services its money can be used for.”

Do you agree with the economics professor? Let us know in the comments section below.

Bank of England’s Deputy Governor Says Crypto Collapse Plausible, Regulators Need to Urgently Establish Rules

14/10/2021 by Idelto Editor

Bank of England’s Deputy Governor Says Regulators Need to Urgently Establish Crypto Rules

Bank of England Deputy Governor Jon Cunliffe says that a collapse in the cryptocurrency market is certainly “plausible,” stating that regulators worldwide need to pursue crypto rules “as a matter of urgency.” While cryptocurrencies do not currently pose a threat to the country’s financial stability, the deputy governor says there are some “very good reasons” to think that this might not be the case for very much longer.

Crypto Collapse Plausible, Crypto Rules Are ‘a Matter of Urgency’

Bank of England Deputy Governor Jon Cunliffe talked about cryptocurrency and its regulation on Wednesday at the SIBOS conference. He emphasized that regulators worldwide need to work quickly and establish rules to regulate cryptocurrencies, given the rapid growth of the industry and how long it takes to put new rules in place.

He said:

Regulators internationally and in many jurisdictions have begun the work. It needs to be pursued as a matter of urgency.

As an example of how long it takes to establish new rules, Cunliffe said that last week global regulators proposed that the safeguards they apply to systemic clearing houses and payment systems should also be applied to stablecoins. He added that it took two years to draft this measure, during which stablecoins increased 16-fold.

Referring to the collapse of the U.S. mortgage market that led to a global banking crisis, Cunliffe opined: “As the financial crisis showed us, you don’t have to account for a large proportion of the financial sector to trigger financial stability problems – sub-prime was valued at around $1.2 trillion in 2008.” He elaborated:

Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the probability of contagion between cryptoassets, the cyber and operational vulnerabilities, and of course, the power of herd behavior.

The Bank of England recently published a report stating that the risks to the stability of the U.K. financial system from cryptocurrencies are currently limited. Cunliffe himself also previously said that the crypto industry was not big enough to pose a threat to the country’s financial stability. However, he said at the conference Wednesday that there are now some “very good reasons” to think that this might not be the case for very much longer.

Recently, the International Monetary Fund (IMF) published a report stating that the rising popularity of cryptocurrency could pose financial stability risks, urging governments worldwide to step up and work together to establish common rules to regulate cryptocurrencies.

Cunliffe further opined:

Indeed, bringing the crypto world effectively within the regulatory perimeter will help ensure that the potentially very large benefits of the application of this technology to finance can flourish in a sustainable way.

What do you think about the comments by the Bank of England’s deputy governor? Let us know in the comments section below.

Bank of England: Crypto Assets Pose ‘Limited’ Risks to Stability of UK Financial System

12/10/2021 by Idelto Editor

The Bank of England says that crypto assets pose “limited” direct risks to the stability of the country’s financial system. “Cryptoasset and associated markets and services continue to grow and to develop rapidly. Such assets are becoming increasingly integrated into the financial system,” the U.K.’s central bank described.

Crypto Poses Limited Risks to UK’s Financial Stability

The Bank of England’s Financial Policy Committee (FPC) published the October edition of the “Financial Stability in Focus” report Friday.

The Financial Policy Committee has 13 members, six of whom are Bank of England staff, including the governor and four deputy governors. The FPC “identifies, monitors and takes action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the U.K. financial system,” the central bank described.

The committee wrote:

Cryptoasset and associated markets and services continue to grow and to develop rapidly. Such assets are becoming increasingly integrated into the financial system. The FPC judges that direct risks to the stability of the UK financial system from cryptoassets are currently limited.

“However, regulatory and law enforcement frameworks, both domestically and at a global level, need to keep pace with developments in these fast-growing markets in order to manage risks and to maintain broader trust and integrity in the financial system,” the committee added.

The committee further noted that it “will continue to pay close attention to developments, including the relationship between cryptoassets and the U.K. financial system, and thereby seek to ensure resilience to systemic risks that may arise from further developments in cryptoasset markets,” concluding:

The FPC considers that financial institutions should take a cautious and prudent approach to any adoption of these assets.

Early this month, the International Monetary Fund (IMF) warned that the rising popularity of cryptocurrencies posed new challenges to financial stability, stating that it could “reduce the ability of central banks to effectively implement monetary policy” and “create financial stability risks.”

In July, Bank of England Deputy Governor Jon Cunliffe said that cryptocurrencies were not big enough to pose financial stability risk. “They’re not of the size that they would cause financial stability risk, and they’re not connected deeply into the standing financial system,” said the deputy governor.

What do you think about the Bank of England’s comments about crypto assets? Let us know in the comments section below.

IMF Warns Crypto Boom Poses New Financial Stability Challenges, Urges Regulators to Step Up

03/10/2021 by Idelto Editor

The International Monetary Fund (IMF) warns that the rising popularity of cryptocurrencies poses new challenges to financial stability. “Cryptoization can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks.”

IMF Sees New Challenges to Financial Stability From Crypto

The International Monetary Fund (IMF) warned about the risks posed by the cryptocurrency boom in a blog post published Friday. The post, titled “Crypto boom poses new challenges to financial stability,” is authored by three financial experts from the IMF’s Monetary and Capital Markets Department: Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou.

Noting that “The total market value of all the crypto assets surpassed $2 trillion as of September 2021 — a 10-fold increase since early 2020,” they said that many entities in the ecosystem “lack strong operational, governance, and risk practices.” These include exchanges, wallets, miners, and stablecoin issuers.

The authors proceeded to discuss “Consumer protection risks,” stating that they “remain substantial given limited or inadequate disclosure and oversight.”

They warned: “Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarization forces in the economy — or in this case cryptoization — where residents start using crypto assets instead of the local currency.” The IMF experts further described:

Cryptoization can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks.

Moreover, they stated: “Threats to fiscal policy could also intensify, given the potential for crypto assets to facilitate tax evasion. And seigniorage (the profits accruing from the right to issue currency) may also decline. Increased demand for crypto assets could also facilitate capital outflows that impact the foreign exchange market.”

The authors also suggested policy action. “As crypto assets take hold, regulators need to step up,” they wrote.

“As a first step, regulators and supervisors need to be able to monitor rapid developments in the crypto ecosystem and the risks they create by swiftly tackling data gaps,” they detailed. “The global nature of crypto assets means that policymakers should enhance cross-border coordination to minimize the risks of regulatory arbitrage and ensure effective supervision and enforcement.”

The IMF experts suggested: “National regulators should also prioritize the implementation of existing global standards. Globally, policymakers should prioritize making cross-border payments faster, cheaper, more transparent and inclusive through the G20 Cross Border Payments Roadmap.” They concluded:

Time is of the essence, and action needs to be decisive, swift and well-coordinated globally to allow the benefits to flow but, at the same time, also address the vulnerabilities.

What do you think about the IMF’s warning and suggestions? Let us know in the comments section below.

Rwanda Central Bank Joins CBDC Bandwagon After Announcing Digital Currency Research

23/06/2021 by Idelto Editor

The National Bank of Rwanda (NBR) has become the latest African central bank to join the digital currency movement after an employee confirmed the institution is studying the possibilities of issuing its own digital currency.

CBDC Implications on Financial Stability

According to the employee, John Karamuka, this study will be looking at economic, financial, and technical aspects related to central bank digital currencies (CBDC), as well as “the operationalization model.” The study will also analyze the “implication of the CBDC on monetary policy and financial stability.”

However, in his remarks to The New Times, Karamuka revealed that the study had exposed the limits or lack of global standards and reliable benchmarks on the subject. On the African continent, a few countries, namely Nigeria, Ghana, and Tanzania recently either signalled plans to explore or have made progress on developing CBDCs. Still, only a few countries globally, including small nations like the Bahamas and The Republic of the Marshall Islands, have seen their CBDC projects make real progress.

Meanwhile, Karamuka, who is the director of payment systems at the NBR, explains how his organization has attempted to benchmark its own progress. He said:

Nevertheless, we are benchmarking on countries that are at more advanced stages, learning both positive and negative experiences. We are basing on work done by international institutions such as the International Monetary Fund, World Bank, World Economic Forum among others.

The Necessity of the CBDC

The New Times report also carried the Rwandese crypto and blockchain community leader’s reaction to the revelations. Norbert Haguma, who is the Chairman of the Rwanda Blockchain Association, questions the necessity of a CBDC. He said:

“A CBDC should retain the best attributes of both cash and existing e-wallet solutions: cash can be exchanged offline, without restrictions or fees, while digital payments such as mobile money allow for instant long-distance transfers.”

Additionally, Haguma suggests that financial inclusion and the CBDC’s interoperability should be key factors that must be considered as well. Following Karamuka’s revelations, Rwanda, whose central bank issued a warning against bitcoin trading in 2018, becomes the latest African country to signal its readiness to embrace emerging fintech. The revelations come a few weeks after the Central American nation of El Salvador made bitcoin legal tender.

What are your thoughts on the NBR’s digital currency study revelations? Tell us what you think in the comments section below.