The International Monetary Fund has said crypto assets are more appealing to countries with younger populations.
It added that countries with weaker economic fundamentals are likely to see a surge in crypto adoption since they (crypto) are perceived as a hedging instrument against exchange rate and inflation.
The IMF disclosed this in its, ‘Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets,’ report.
It said, “Crypto assets have grown considerably in the past decade. Adoption of crypto assets across the globe has been driven by a host of technological, macroeconomic, institutional, and demographic factors.
“As such, the demand for crypto assets could be sustained. A cross-country review and econometric analysis using a panel regression model confirm the relative importance of macroeconomic and demographic factors in driving crypto-asset adoption.
“These results suggest that crypto assets have served as a perceived hedging instrument against exchange rate and inflation risks—particularly in countries with weaker economic fundamentals—and are more appealing to countries with younger populations.”
According to the Washington-based lender, crypto assets could pose significant macro-financial risks, including for the implementation of Capital Flow Managements. It stated that the emergence of crypto assets and their associated ecosystems as new instruments, new service providers, and new payment rails could challenge authorities’ ability to monitor capital flows and enforce CFMs through regulated intermediaries.
It added that the decentralised, borderless, and pseudonymous nature of crypto assets ensures that they can be used to CFMs.
It said, “Such specific characteris¬tics are compounded by gaps in the legal and regulatory frameworks; these gaps result in key crypto-related activities and service providers lying outside the regulatory perimeter.
“Existing foreign exchange and CFM laws and regulations typically do not cover crypto assets, and coordination and information sharing arrange¬ments among relevant authorities, both at home and abroad, are lacking.”
The IMF said to preserve the effectiveness of CFMs against crypto-related challenges, policymakers will need to consider a multifaceted strategy. That there is a need for such strategy to include a comprehensive, consistent, and coordinated regulatory approach to crypto-assets and apply it effectively to CFMs.
It added, “Estab¬lishing international collaborative arrangements for implementation; addressing data gaps and leverage technology to create anomaly-detection models and red-flag indicators, to allow for timely risk monitoring; and striking a good balance between ex ante and ex post enforcement.”
The lender stated the challenges crypto assets pose to CFMs are likely to persist in emerging markets and developing economies where regulatory and technological capacity constraints are significant.