IMF: Rapid Development of Cryptocurrencies Poses Challenges to Financial System

Christine Lagarde, head of the International Monetary Fund (IMF), said the world is on the verge of another financial crash. The increased cybersecurity risk coming from the rapid development of financial technologies such as digital currencies is a reminder that the permanent evolution of the financial system requires vigilant regulators and supervisors, she added.

IMF’s Lagarde Says World Risks Another Financial Crash

Speaking before the IMF forthcoming annual meeting, Managing Director Christine Lagarde said: “large challenges loom for the global economy to prevent a second Great Depression”. The fund is concerned with bank concentration, rising lending by shadow banks in China, and the laissez-faire approach on insurance companies and asset managers, which handle trillions of dollars.

The total value of global debt, including both the public and private sectors, has hit an all-time high of $182 trillion, a growth of 60 percent since the Great Recession of 2008. Developing world governments and firms are vulnerable to the rising interest rates by the U.S. Federal Reserve which may trigger a flight of funds. The recent crises in Argentina and Turkey may extend to the rest of the developing world.

In regard to cryptocurrencies, IMF’s Chapter 2 of the Global Financial Stability Report – Regulatory Reform 10 Years after the Global Financial Crisis: Looking Back, Looking Forward – advises regulators to remain attentive to risks coming from fintech and cybersecurity.

“Despite its potential benefits, our knowledge of its potential risks and how they might play out is still developing. Increased cybersecurity risks pose challenges for financial institutions, financial infrastructure, and supervisors. These developments should act as a reminder that the financial system is permanently evolving, and regulators and supervisors must remain vigilant to this evolution and ready to act if needed.”

Bitcoin and the cryptocurrency market first found support from technologists and libertarians in the post-2008 crisis era. Many digital currency enthusiasts joined the ecosystem to flee from fiat money controlled by central banks and governments. Christine Lagarde has an optimistic view for cryptocurrencies.

Digital currencies “can play a role in how people save, invest, and pay their bills”, the IMF chief wrote in her blog. “In developing economies, such advances can help secure property rights, increase market confidence and promote investment”.

Unlike libertarians such as Roger Ver and John McAfee, Christine Lagarde defends central banks’ role in the management of currencies and the financial system. “If privately issued crypto-assets remain risky and unstable, there may be demand for central banks to provide digital forms of money”, she added in the blog.

Image from Shutterstock