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What are Reasons Behind IMF’s Warning Against Cryptocurrencies?

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By David Drake

 

This past month, the International Monetary Fund (IMF) became the first global financial body to raise alarm over the fast growth of virtual assets and the impact this new asset class could have on the global financial market. The IMF warning comes just a month after the UK government issued a statement that branded the cryptocurrency industry a ‘wild west’. This is not the first time the IMF is raising concerns about cryptocurrencies.

In February of this year, IMF’s Chief, Christine Lagarde, went on record saying the Fund was concerned with the fact that digital currencies can be used in illegal financial transactions with ease. This means that global regulatory actions are critical in the industry. According to the Fund, delays in enacting and implementing such regulation only makes the industry more vulnerable to financial risk.

John Hoelzer, founder and CEO of ONe Network, agrees with the IMF but notes that these challenges can be overcome. He says, “I believe the IMF has a point in that, yes there will be vulnerabilities. But, these can be overcome and will bring more positive change to the financial system than negative.”

The Risks

Despite the negative statement from the IMF, the World Bank has been quite receptive of digital assets. Even though the IMF has warned about the impact of cryptocurrencies, the regulatory agency is looking into ways that leading cryptocurrencies can be incorporated as legal investment tools. This will facilitate their utilization in cross border transactions.

According to the Fund, the high volatility of cryptocurrencies is increasingly making the financial system globally vulnerable to numerous risks, including attacks in cyberspace. Even though the IMF has noted that cryptocurrencies and the technology that underpins them, blockchain, have potential benefits, the fund says that the full extent of risks involved in the industry has not enfolded fully yet.

A report released by McAfee recently shows that cyber criminals have plans to target tech devices with crypto malware. The report further shows that cumulatively, cryptocurrencies worth $1.5 billion was stolen between 2016 and 2018. Internet routers have also been targeted for crypto mining in recent years.

Fluctuating Prices

The volume of global trade will be affected by the high volatility being experienced in the cryptocurrency sector. Though the IMF Chief has in the past appreciated virtual currencies, the Fund has raised concerns over the increase in private and public debt. In just a decade, this kind of debt has reached a high of 60%.

Since December 2017, the cryptocurrency industry has been experiencing sharp price highs and lows. The IMF believes that these price fluctuations may be due to lack of clear regulations coupled with the fact that the industry is still young and the majority of people are still not familiar with market operations. For the Fund, these two aspects mean that the risks involved will continue to rise as the market grows.

But there is a chance the IMF warning will have little impact on the global cryptocurrency industry.

“As the current system is bloated and full of inaccuracies. The reason crypto and blockchain was invented in the first place is the collapse in the financial system back in 2008. The current vulnerabilities are obvious and allow for even more abuse by middlemen and those who believe they can manipulate the system because they are the system. Currently the world’s financial system is collapsing under its own weight and is pushing out a huge percentage of the world’s population. Crypto will recover from the IMFs statements and will flourish with or without the IMFs approval in the long term,” Hoelzer adds.

 

 

 

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

 

 


 

About David Drake

David Drake, Contributing Journalist.Reach him directly at David@LDJCapital.com.

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