WEF 2016: IMF Explores Various Aspects Of Virtual Currencies and Distributed Ledger Technologies

The cryptocurrency ecosystem seems to be finally getting reasons to rejoice. First, the news came that the Chinese central bank is planning to launch its own digital currency, and now the International Monetary Fund has released a paper that discusses the risks and benefits of virtual currencies (VC).

IMF Managing Director Christine Lagarde presented the paper entitled, “Virtual Currencies and Beyond: Initial Considerations” at the ongoing World Economic Forum (WEF) 2016 in Davos during the panel "Transformation of Finance".

“VCs offer many potential benefits, including greater speed and efficiency in making payments and transfers—particularly across borders––and ultimately promoting financial inclusion. The distributed ledger technology underlying some VC schemes—an innovative decentralized means of keeping track of transactions in a large network––offers potential benefits that go far beyond VCs themselves”, the paper reads.

However, IMF also noted the potential risks associated with VCs such as money laundering, terrorist financing, tax evasion and fraud. It further said that given the very small scale of VCs at present, the risks to the conduct of monetary policy is not much likely to arise, but with widespread acceptance and use of the technology, risks to financial stability may increase.

In addition to virtual currencies, the paper also touched upon the topic of the underlying distributed ledger technology (for example, blockchain technology behind bitcoin) and said that the technology is already emerging in different parts of the mainstream financial system and beyond VCs. It said that the technology has the potential to change finance by reducing costs (of international transfers, particularly remittances) and allowing for wider financial inclusion.

It added, “In particular, it is possible to design distributed ledgers for transactions denominated in fiat currencies, instead of in VCs”.

Drawing attention to the regulation of virtual currencies, IMF recommends that national authorities will need to “calibrate regulation in a manner that appropriately addresses the risks without stifling innovation.”

It said that more efforts in this direction at the international level will help to facilitate the process of developing and refining policies at the national level. International standards can provide guidance on most appropriate regulatory responses in different fields, thereby promoting harmony across jurisdictions.