IMF Warns of DeFi and Stablecoin Risks, Biden Administration Taking ‘Aggressive’ Approach to Crypto

The Biden administration is ramping its regulatory scrutiny of cryptocurrency and will make a move to address a range of risks, reported the Wall Street Journal, citing a senior White House official.

Peter Harrell, senior director for international economics and competitiveness with the National Security Council at the WSJ Risk & Compliance Forum on Tuesday, said,

“You’re really seeing the administration at the beginning of what we expect will be an ongoing, quite aggressive effort to make sure we understand and address the whole range of risks that we see in the cryptocurrency space.”

At the same time, the administration seeks to position the U.S. as a leader in digital asset innovation.

According to Harrel, the agencies do think the cryptocurrency industry has “some potential benefits,” such as financial inclusion, but added, “there are clearly a whole range of risks.”

“I think you’re really seeing the administration kind of moving out on a number of different lines of work to make sure that we have a smart and effective regulatory system in place for cryptocurrency.”

A Sound Regulatory Framework

Elsewhere, the International Monetary Fund warned that the rapid growth of cryptocurrencies poses several risks to both investors and policymakers.

While the “crypto ecosystem offers an exciting new world of opportunities,” it also has its challenges in the form of risks to consumers from lack of operational or cyber resilience and anonymity and limited global standards creating data gaps for regulators, which in turn pose a threat to financial integrity, it said.

Moreover, “the advent of crypto assets and stablecoins in emerging markets and developing economies may accelerate dollarization risks,” said the IMF adding these markets can face “destabilizing capital flows” because cryptos are used to circumvent capital controls.

The report also mentions investor protection risks for DeFi, which it says is “gaining momentum by offering new services to users,” and inadequate reserves and limited disclosure for some stablecoins.

Decentralized finance (DeFi), according to the IMF, is actually one of the main drivers of the rapid growth of stablecoins as such “warrants close attention.”

“A sound regulatory framework for crypto assets, and decentralized finance markets more generally, must be a priority on the global policy agenda.”

When it comes to stablecoins, the IMF says regulations should correspond to the risks they pose and the economic functions they perform.

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