- The IMF has strong reservations about cryptocurrencies, mainly because the market is growing at an extreme pace and regulation worthy of the name does not exist
- The market value of global crypto assets had surpassed two trillion dollars as of September 2021 – a tenfold jump from January 2020
Evan Papageorgiou, deputy department head at the IMF, told CNBC that the crypto ecosystem has grown significantly, and while the growth process shows remarkable stability, there have also been tough stress tests. Specifically, the IMF cites three reasons for its concerns about cryptocurrency:
A lack of experience
Quite a few companies dealing in digital assets lack operational experience, governance experience and risk management experience. An example: The German savings banks. They are taking on a huge responsibility with their new offer of cryptocurrencies: In large parts of the population, the savings banks stand for security. What they offer should not put private individuals in financial distress – at least, that is the assumption. But this is precisely why inexperienced investors could be given a false sense of security if they see the new offer as a kind of savings bank seal of approval for the asset class. As before, however, investments in cryptocurrencies are highly speculative, and investor protectors, again and again, warn of strong price fluctuations and the risk of high losses.
Poor consumer protection
There is insufficient disclosure and oversight. Advertising for cryptocurrency needs to be controlled, and there is a need to educate people about the risks associated with investing in such a volatile asset. Prices can fluctuate over a short period of time.
An additional problem is that young people are very interested in this market and often make their very first investment through credit.
Data published by the UK’s Financial Conduct Authority (FCA 9 shows that about 2.3 million people in UK own cryptocurrencies. 14% of them use credit to buy them, and 12% of them believe that the FCA will protect them from any investment risks.
A survey of 1.000 UK adults aged 18 to 29 in July found that 27% of them used credit cards to invest in cryptocurrency, 17% used their student loans and 12% used other types of loans. Such investors take extreme risks because the loans they take out are in fiat currency – not cryptocurrency.
Charles Randell, chairman of the FCA, pointed out a particular risk in a September 2021 speech, the seduction of “influencers.”
Social media influencers are regularly paid by scammers to help them pump and dump new tokens based on pure speculation. Some influencers promote coins that don’t even exist.
Kim Kardashian, a celebrity with more than 200 million Instagram followers, promoted her account for a cryptocurrency called “Ethereummax” earlier this year. Critics pointed out that few details were known about it. “This is not financial advice, but I am sharing what my friends have told me about the Ethereum Max token,” Kardashian’s post read. She had added several hashtags, foolishly including the hashtag “#ad,” revealing that she was paid for the post.
“Cryptocurrencies are often promoted right next to posts like this that show a glamorous lifestyle, and I think that association is very dangerous and harmful to young people,” Myron Jobson, personal finance campaigner at Interactive Investor, told CNBC.
Money laundering and terrorist financing
Crypto assets could facilitate cybercrime, particularly fraud, money laundering and terrorist financing.
According to the IMF, national regulators should work to establish uniform rules across the globe to improve cross-border oversight and, because it is such a new area, drive data standardization:
Time is of the essence, and action needs to be decisive, swift, and well-coordinated globally to reap the benefits while addressing the vulnerabilities.