Cryptocurrencies

Why the IMF is worried

Why the IMF is worried

The International Monetary Fund is concerned about cryptocurrencies, especially because the nascent market is growing at such a rapid pace and regulation is not keeping up.

The total market value of all crypto assets surpassed $2 trillion in September this year, representing a 10x jump from levels seen at the start of 2020, according to data collected by the IMF.

Evan Papageorgiou, deputy division chief at the IMF, told CNBC in October that “the crypto ecosystem has grown tremendously… The process is showing remarkable resilience, but there has also been testing interesting resistors”.

One of the problems the IMF has highlighted is that many individuals and financial institutions trading these assets “lack strong operational, governance and risk management practices.”

As such, the Fund said that consumers are at risk, adding that there is simply “inadequate disclosure and oversight” in this space. Furthermore, he believes that crypto assets create “data gaps” and “can open unwanted doors to money laundering, as well as terrorist financing.”

Other establishments called for more action to make these investments safer. Cryptocurrencies can be a divisive topic, with some claiming they are the future of money and others making more skeptical arguments about their risks.

A visual representation of cryptocurrencies.

Jakub Porzycki | NurPhoto | Getty Images

Crypto Influencers

The UK financial regulator, the FCA, has warned of the link between social media and crypto investments.

“Social media influencers are routinely paid by scam artists to help them pump and dump new tokens on the back of pure speculation. Some influencers promote coins that just turn out not to exist at all” , FCA President Charles Randell said in a speech in September.

He added that because of the newness of this technology, “we haven’t seen what will happen over a full financial cycle. We just don’t know when or how this story will end, but – as with any new speculation – it may not end well.”

Kim Kardashian, a celebrity with over 200 million Instagram followers, got paid to advertise a crypto token on her account earlier this year. Critics pointed to the few details known about the developers of ethereummax, the currency it advertised. “This is not financial advice but a sharing of what my friends have told me about the Ethereum Max token!” Kardashian’s message read. She added different hashtags, including #ad, which is needed to reveal that her post is paid.

Other social media users with huge amounts of followers, known as influencers, have also advertised crypto assets on their accounts.

“Cryptocurrencies are often advertised alongside these messages deploying this glamorous lifestyle and I think this association is very dangerous and harmful for young people,” said Myron Jobson, a personal finance campaign manager at Interactive. Investor, at CNBC in October.

Standardization

He said policymakers need to look at cryptocurrency advertising and make sure they explain to people the risks associated with investing in such a volatile asset. Prices can fluctuate wildly even in a single trading day.

An additional problem for policymakers is that young people are very interested in this market and often make their first investments in cryptocurrencies, using loans and credit cards to do so.

Data released by the FCA in June showed that around 2.3 million people in the UK hold cryptocurrencies. 14% of them use the credit to buy them and 12% of them believe that they will be protected by the FCA in the event of a problem. But the FCA said it would not protect them.

A survey out of 1,000 UK adults aged 18-29 showed in July that 27% used credit cards to invest in the dogecoin crypto meme, 17% used their student loan and 12% said they used other types of loans.

This could become a double-edged sword as investors could face losses on their cryptocurrencies and then struggle to repay the loans and credits they took out to make those investments.

IMF says national regulators should strive for common rules globally, improve cross-border surveillance and, as this is such a new area, push for data standardization .

“Time is running out and action must be decisive, swift and well-coordinated globally to allow benefits to materialize but, at the same time, to address vulnerabilities,” the IMF said in October.

—CNBC’s Taylor Locke contributed to this article.