Speech Klaas Knot - Introductory remarks IMF statistical forum

Date: 16 November 2023
Speaker: Klaas Knot
Location: Introductory remarks IMF statistical forum

Since the mining of the first Bitcoin block in 2009, crypto-asset markets have shown a remarkable evolution: from a niche experiment to a complex and interconnected financial ecosystem. This rapid expansion prompted the FSB to start monitoring crypto’s systemic implications from 2018 onwards.

Quite soon after that it became clear that not all that glitters is gold in crypto. While decentralized ledger technologies continue to hold the promise of serious societal benefits, some of the ‘use cases’ we’ve seen were just outright fraudulent. This underlines the crucial role played by data in any policy response to crypto: only reliable data will allow us to accurately separate the wheat from the chaff. 

Let me kick-off today’s discussion by debunking three common misconceptions about crypto-assets and laying out a clear path I see towards responsible innovation.

First, ‘stablecoins’. These are a specific type of crypto-assets that purport to hold a stable value towards fiat currency or a pool of assets. Not only are stablecoins not really coins, they also have not been very stable.

If improperly regulated stablecoins become more widely adopted, they could rapidly become relevant for global financial stability given their ‘money-like’ nature. Recent announcements have underscored that interest in these assets has not abated. The FSB will monitor these developments closely.

Second, many crypto proponents claim that blockchain offers an immutable and transparent record which regulators can then use to continuously supervise these activities. But that’s not entirely accurate either: many activities occur off-chain and certain information that regulators require is not disclosed at all by the blockchain.

And finally – and this debunking may hurt the most for the true believers – ‘crypto’ is not as decentralized as is often proclaimed. Economic forces have objectively led to the emergence of highly centralized crypto service providers. These entities have become essential for the functioning of the crypto-market.

For some, the failures of prominent service providers have underscored the need for more decentralization in crypto, rather than less. They believe that financial services can be disintermediated through the inception of ‘decentralized finance’, often abbreviated as DeFi. However, on-chain analysis has shown that governance tokens, which are used to vote on fundamental governance changes to the DeFi protocol, are in practice only held by a very small group of people. How ‘decentralized’ is that?

So, it’s clear that not everything in crypto is what it initially seems to be. This is also true if you look at the economic functions of crypto-activities, which clearly replicate traditional finance. Think for instance of the underlying similarities between ‘staking’ and the century old practice of deposit-taking.

But unlike traditional financial activities, crypto-asset activities are not globally subjected to comprehensive regulation. And where relevant standards are applicable, they are not always consistently applied. That’s problematic considering crypto’s borderless nature. These regulatory inconsistencies, combined with the rapid pace of developments, led the FSB to conclude in 2022 that crypto-assets could soon start to pose a threat to the global financial system.

To address the financial stability risks of these activities, we delivered a Global Regulatory Framework with policy recommendations to authorities. This framework is based on the well-known ‘same activity, same risk, same rule’ principle. It’s now up to national authorities to implement these recommendations. We aim to complete a review of their progress by end-2025.

The FSB recognizes that the emergence of crypto-assets has also brought a broader set of societal issues to the fore. Financial stability risks may for example be aggravated through growing currency substitution by crypto-assets. At the request of the Indian G20 Presidency, the FSB and IMF have worked to further understand how crypto’s macroeconomic and financial stability risks interact and reinforce each other. In our final report, we ‘synthesize’ our recommendations to address both types of risks.

The path forward sketched by this Synthesis report is clear: we need to regulate crypto-asset activities comprehensively and in line with the well-known ‘same activity, same risk, same rule’ principle. Only then can financial stability risks and monetary stability risks be effectively addressed. And given the rapid speed of market developments, there is absolutely no time to dilly-dally: these recommendations need to be implemented as soon as possible.

As we are at a Statistical Forum today, this is a good place to emphasize the importance of data. Having access to accurate and reliable data is needed to navigate crypto’s complex waters. Having the right data is crucial if we want to identify all material stability risks, especially in a market that evolves so rapidly. And only the right data will help us see what happens below deck or ‘chain’.

Access to reliable data will become even more relevant once we start implementing the FSB’s Regulatory Framework. The resulting toughening of requirements may incentivize crypto service providers to relocate abroad. Where will the crypto-ships sail when some crypto-ports become less welcoming?

Our framework seeks to address this question in part by requiring crypto service providers to reliably disclose and report financial data. Only then can we see if certain service providers do not just try to evade regulation by setting up shop in remote places. Only then can we see if DeFi is not just used to avoid having to comply with robust governance requirements.

The sooner we implement these recommendations, the sooner we get this all too valuable data. And this is of course where we will have to rely on the hard work of many of you here today. Statisticians have an essential role to play in collecting data, integrating this new data into existing databases and coming up with new statistical indicators that are able to provide meaningful and timely insights into the crypto-ecosystem.

The path I have charted earlier will also require close cooperation at the global level. One particularly urgent issue here is the considerable risks crypto-assets pose to emerging markets and developing economies, or EMDEs for short. We already see that crypto-assets are more widely used in EMDEs. In part this may be because of weaker domestic macroeconomic frameworks, leading for example to currency substitution by stablecoins. It’s crucial that local authorities are able to understand the size of these risks. In 2024 the FSB will therefore work to enhance ways to practically enhance information-sharing between EMDEs and advanced economies.

In the context of crypto’s borderless nature, we also need to build institutional capacity to effectively regulate crypto beyond our membership. At first, we will focus on positive incentives to promote global adoption, such as outreach and technical workshops. And that’s why it’s crucial the FSB works closely together with the IMF, with its great resources and knowledge in this domain, and its near-global membership. In this context, let me also note the importance of the IMF’s ongoing work on addressing data gaps, such as via the third edition of the G20 Data Gaps Initiative.

The question remains whether this focus on positive incentives will be enough in the long run. If we observe that certain crypto-providers continue to evade regulation by offering their services from jurisdictions with weaker standards, we may need to take extra steps. Such as by asking traditional financial institutions to take extra precautions when dealing with those providers.

As said, I think the path forward is clear. But if you want to know even more about it, I would recommend you consult our roadmap, which outlines the steps we will take to ensure effective, flexible, and coordinated implementation of the FSB’s and IMF’s policy frameworks. Policy frameworks which taken together seek to: build institutional capacity beyond G20 jurisdictions; enhance global; coordination, cooperation, and information sharing; and address data gaps necessary to understand the rapidly changing crypto-asset ecosystem.

Dear colleagues, the path forward is charted. Now let’s start walking it together. Thank you.