The International Monetary Fund (IMF) released a report discussing the advancement of digitalization and cryptography. The institution notes that with the market capitalization exceeding $1.2 trillion, crypto assets constitute a “shadow financial system,” representing a vital component of the finance sector.
The rapid growth of the crypto economy comes with a range of benefits, such as more efficient payment systems, faster cross-border transfers, lower transaction costs, and greater financial inclusion, but it also involves serious risks with potential “dire consequences” to global finance.
In the paper, the IMF underscores the need to mitigate macrofinancial hazards related to unwanted spillovers from the crypto space to the rest of the financial sector, proposing a framework for monitoring such risks.
The conceptual tool dubbed C-RAM, short for crypto risk assessment matrix, applies a three-step process, including:
- a decision tree to assess the crypto sector’s criticality for the macroeconomy,
- country-level risk-mapping based on the macrofinancial-like indicator analysis,
- a global crypto risk assessment matrix covering global microfinancial risks.
An exemplary C-RAM names four crucial crypto-related (for-crypto and from-crypto) risks along with likely implications:
- surging inflation and the ensuing tightening of monetary policy,
- increased risk aversion in financial markets and flight-to-safety trends,
- bankruptcies of major cryptos with possible cross-border contagion and price pressure on “stability” assets,
- increased adoption of cryptocurrencies as legal tenders and capital flow fluctuations, including sudden stops and outflows, combined with the weakening of AML surveillance.
The last bit is quite interesting and music to the ears of crypto buffs. However, the IMF deems accelerated crypto adoption a potential systemic threat, pointing to credit, market, legal, cyber security, and liquidity risks.
The paper goes on to apply C-RAM to three country cases: El Salvador, Central African Republic, and Vietnam.
It concludes that global crypto risks are likely to be relevant for El Salvador and Vietnam due to the high level of dollarization in the first case and increased dependence on external markets in the latter case. For CAR, risks are estimated as “not likely to be highly relevant,” except for possible spillovers with and from other CEMAC (Economic and Monetary Community of Central Africa) countries.
