Virtual currencies and their underlying distributed ledger technology have the potential to revolutionize finance by reducing costs and improving financial inclusion, but also pose risks that regulators must address without stifling innovation, concludes a staff paper released on Wednesday by the Washington, D.C.-based International Monetary Fund (IMF).
A key conclusion of the report is that the distributed ledger concept has the potential to change finance by reducing costs and allowing for deeper financial inclusion in the longer run.
“This could be especially important for remittances, where transaction costs can be high, around 8%,” the IMF says in a statement. “Distributed ledgers can also shorten the time required to settle securities transactions, which currently take up to three days, as well as lower counterparty and settlement risks,” the IMF statement says.
At the same time, the IMF also warns that virtual currencies can also be exploited as vehicles for money laundering, terrorism financing, and tax evasion. Additionally, “risks to financial stability may eventually emerge as the new technologies become more widely used,” the IMF report says.
As a result, “Achieving a balanced regulatory framework that guards against risks without suffocating innovation is a challenge that will require extensive international co-operation,” the IMF statement says.
The report also sets out principles for the design of regulatory frameworks for VCs at both the domestic and international levels. It recommends that regulators design approaches to virtual currencies that take into account the novel business models inherent in these schemes, such as the absence of central authority in a cryptocurrency. Additionally, it says that regulation may need to address both market conduct issues and the financial soundness of intermediaries. And, it recommends that consideration be given to the degree of integration between the conventional financial system and the virtual market.
“Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world,” says IMF managing director, Christine Lagarde, who presented the report at the World Economic Forum in Davos on Wednesday.
“The challenge will be how to reap all these benefits and at the same time prevent illegal uses, such as money laundering, terror financing, fraud, and even circumvention of capital controls,” she adds.
Canada’s Standing Senate Committee on Banking Trade and Commerce reached similar conclusions in a report that it released last year, which recommended that policymakers take a largely “hands off” approach to regulator the emerging sector to allow innovation, while also guarding against criminal uses for the technology.