IMF: Cryptocurrency is not a fad that can be dismissed
The only way to solve cryptocurrency is by embracing it, says Christine Lagarde.
Cryptocurrency is here to stay. It's not a passing fad and regardless of how speculative it is, there's an unmistakable undercurrent of real value. It's extremely useful, in both right and wrong hands, which is why it can't be dismissed and needs to be regulated.
But the benefits it brings doesn't make it easy. Regulators and banks need to "fight fire with fire" and look at solutions which are themselves rooted in cryptocurrency and blockchain technology. The goal should be to legitimise cryptocurrency and thereby drive criminals out of the crypto-space.
That's the gist of what the International Monetary Fund's (IMF) managing director Christine Lagarde has said about cryptocurrency.
Christine Lagarde and the IMFThe significance of Lagarde's input shouldn't be underestimated.
The IMF is an international organisation of 189 countries, focused on global monetary cooperation and financial stability. It was created in 1945 to help bring financial peace to the world in the post-war years, and since then has been among the last word on just about any global financial issue.
Christine Lagarde is its director. After a political science, professional synchronised swimming and legal career spanning decades she joined the French government, and in 2007 became the first woman to hold the post of Finance and Economy Minister in a G-7 country. She later chaired the European Union's economic and finance council, and then in 2011 started heading up international monetary policies when France took its position as the 2011 G-20 president. Five years later she was re-elected to do it for a second term.
No international monetary policies can be formed with negotiation and input from a range of stakeholders and advisers, but when you get down to individuals, Lagarde is one of the most economically influential names on the planet.
"The technology behind these assets—including blockchain—is an exciting advancement that could help revolutionize fields beyond finance. It could, for example, power financial inclusion by providing new, low-cost payment methods to those who lack bank accounts and in the process empower millions in low-income countries. The possible benefits have even led some central banks to consider the idea of issuing central bank digital currencies. Before we get there, however, we should take a step back and understand the peril that comes along with the promise," Lagarde writes.
"The same reason crypto-assets—or what some people call crypto-currencies—are so appealing is also what makes them dangerous. These digital offerings are typically built in a decentralized way and without the need for a central bank. This gives crypto-asset transactions an element of anonymity, much like cash transactions. The result is a potentially major new vehicle for money laundering and the financing of terrorism," Lagarde writes.
"Of course, money laundering and terrorist financing is only one dimension of the threat. Financial stability is another. The rapid growth of crypto-assets, the extreme volatility in their traded prices, and their ill-defined connections to the traditional financial world could easily create new vulnerabilities."
"...more needs to be done to get a handle on the emerging threat posed by crypto-assets and to secure a stable financial system. Where can we start?"
Fighting fire with fire
"We can begin by focusing on policies that ensure financial integrity and protect consumers in the crypto world just as we have for the traditional financial sector. Indeed, the same innovations that power crypto-assets can also help us regulate them. To put it another way, we can fight fire with fire. Regulatory technology and supervisory technology can help shut criminals out of the crypto world."
Lagarde cites two areas of technology that can help.
The first is distributed ledger technology (DLT), also known as "the blockchain."
"Distributed ledger technology (DLT) can be used to speed up information-sharing between market participants and regulators. Those who have a shared interest in maintaining safe online transactions need to be able to communicate seamlessly. The technology that enables instant global transactions could be used to create registries of standard, verified, customer information along with digital signatures. Better use of data by governments can also help free up resources for priority needs and reduce tax evasion, including evasion related to cross-border transactions."
Lagarde isn't the first legislator to ponder the merits of blockchain technology in regulation. Recently the USA's CFTC chairman Christopher Giancarlo has said that blockchain technology could probably have prevented the 2008 global financial crisis. He's probably right.
The second area Lagarde mentions is accompanying digital security and ID systems, fuelled by AI, cryptography and biometric developments. Identity is at the core of financial institution security, and at this stage, it's looking almost certain that the future of identity lies on the blockchain.
- Microsoft assessed all the options and found DLT to be the best fit for everything ID. It will be testing and releasing its blockchain ID system in 2018.
- ID is one of the top priorities of current development in the Ethereum ecosystem where it's being built around two new standards; ERC725 and ERC735.
- Many individual cryptocurrencies are racing to implement ID solutions. For example, ICON (IXC) plans to bring FIDO compliant biometric security to its blockchain, and others like Civic (CVC) are entirely new cryptocurrencies dedicated to setting a new global ID benchmark.
"As I have said before, it would not be wise to dismiss crypto-assets; we must welcome their potential but also recognize their risks," Lagarde says.
"By working together, and leveraging technology for the public good, we can harness the potential of crypto-assets while ensuring that they never become a haven for illegal activity or a source of financial vulnerability."
The next step is probably a global regulatory framework which will undoubtedly take a lot of time and effort to hammer out. Individual countries, and even individual states in the case of the USA, have been making their own regulatory decisions. But this piecemeal approach doesn't do much for borderless technology like cryptocurrency, and a unified, global regulatory approach would probably be very welcome in most places.
"To be truly effective, all these efforts require close international cooperation. Since crypto-assets know no borders, the framework to regulate them must be global as well... Countries will have to decide collectively that this path is worth pursuing," Lagarde says.
Cryptocurrency has been put on the agenda for the 2018 G-20 summit, but that's not until November, a long way off in cryptocurrency time. At this rate it's looking like meaningful and coherent global frameworks designed especially for cryptocurrency won't be arriving until 2019, or even later.
With cryptocurrencies taking their own highly efficient steps towards effective ID systems and reputable cryptocurrency exchanges are already contorting themselves around existing international laws as best they can, and consequently self-regulating to a higher standard than most banks, it's possible that the eventual global regulations will actually loosen the reins slightly.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, SALT, BTC, NANO