The release of a thought-provoking working paper “Assessing Macrofinancial Risks from Crypto Assets” by the International Monetary Fund (IMF) on Sept 29, introduces a novel crypto-risk assessment matrix (C-RAM). This strategic tool is designed to assist risk-prone nations in identifying, mitigating, and preventing the impact of cryptocurrencies on their economy and investors.
The paper proposes an intriguing shift from traditional financial approaches. While typical finance strategies are uniform across the board, this crypto-centric framework would consider unique aspects of digital assets that affect their macro-financial impact on society. These encompass elements such as fluctuating market liquidity, concentration risks, and legal and credit risks tied to issuers, miners/validators, exchanges, wallet providers, payment providers, and users.
Emphasizing on the inherently high market volatility of digital assets, several financial regulators have ramped up their risk control measures to safeguard investors. Investors’ protection measures include tightened control on multiple market makers and requisite disclosures. The necessity for these precautionary steps was underscored by the unfortunate crashes of Terra Network and digital currency exchange FTX in November 2022.
Marked by several unfavourable implications such as climate concerns, inflation, and adverse effects on emerging markets, this global calamity rubbed salt into existing wounds, effectively wiping off billions from the cryptocurrency market. Consequently, regulators worldwide are under immense pressure to refine their oversight of the sector.
Groundbreaking changes, however, are not devoid of potential pitfalls. In making cryptocurrencies a legitimate tender, trepidations surrounding potential sovereignty problems, and related macroeconomic challenges imply a need for thorough scrutiny. For nations such as El Salvador and the Central African Republic, where digital assets serve as currency, the embracement of cryptocurrencies as legal tender opens the door to uncharted challenges and risks.
Ending on an optimistic note, the IMF paper suggests a three-step approach to navigate countries around the potential pitfalls associated with cryptocurrencies. It proposes utilizing a decision tree to evaluate the economic significance of crypto space, exploiting conventional tools that influence macroeconomic factors and eventually acknowledging global risks to the nation’s policies, from climate-related issues to regulatory changes.
Showcasing the volatility of the crypto market, the fallout from the financial catastrophe of the Terra Network and FTX continues to mold the way regulators navigate the nascent industry. The approach is often seen as a obstacle to the growth of the market, thus underscoring the vital balance between facilitating innovative growth and shielding investors from macroeconomic vulnerabilities.
Source: Cryptonews
