The International Monetary Fund (IMF) is warning that a spike in %Cryptocurrency trading in emerging markets could harm the global financial system.
In its latest report on global financial stability, the IMF warns about the increased use of cryptocurrencies in emerging markets since the start of the COVID-19 pandemic.
The Washington, D.C.-based agency also noted that trading volumes of cryptocurrencies against some emerging market currencies have increased since the West sanctioned Russia over its invasion of Ukraine.
%Tether ($USDT), the largest %Stablecoin used to settle spot and derivative trades, has seen a big rise in trading volumes against emerging market currencies over the last year, says the IMF. That increase is particularly notable in Turkey, where exchange rate volatility has been high, and the overall use of cryptocurrency assets has gained traction.
Although a large part of the uptick stems from speculative investors, a shift towards using cryptocurrencies as a means of payment could create challenges for policymakers around the world, says the IMF.
The war in Ukraine has also shined the light on the risks of cryptocurrency payment systems, which are decentralized. The lack of a centralized payment system makes it harder to track illicit activity for cryptocurrency and to enforce sanctions.
The IMF warns cryptocurrency exchanges that don’t comply with sanctions or properly monitor illegal activity could be used to circumvent sanctions. At the same time, they say, the technology cryptocurrencies use increases the secrecy of transactions, allowing dealings to be covered up more easily.
U.S. Treasury Secretary Janet Yellen told the House Financial Services Committee earlier in April that the U.S. is monitoring whether cryptocurrencies are being used to evade sanctions, though she said the Treasury Department hasn’t seen that kind of activity yet.
The IMF recommends that policymakers develop coordinated regulations for cryptocurrency assets to manage capital flows, create international collaboration, address data gaps and leverage technology. Regulators should also create a “Financial Action Task Force” to enforce standards to guard against illicit capital flows, the IMF said in its report.