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International Monetary Fund. Monetary and Capital Markets Department

significant impact on financial stability, globally or domestically. However, as crypto assets grow, the macro-criticality of such risks is likely to increase. In addition, the crypto ecosystem remains exposed to concentration risks, given its large reliance on a few entities (for example, Binance handles more than half of trading volumes, and Tether has issued more than half the supply of stablecoins). With limited or inadequate disclosure and oversight, the crypto ecosystem is exposed to consumer fraud and market integrity risks. Most crypto assets are highly volatile

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial stability risks have been contained so far, reflecting ongoing policy support and a rebound in the global economy earlier this year. Chapter 1 explains that financial conditions have eased further in net in advanced economies but changed little in emerging markets. However, the optimism that propelled markets earlier in the year has faded on growing concerns about the strength of the global recovery, and ongoing supply chain disruptions intensified inflation concerns. Signs of stretched asset valuations in some market segments persist, and pockets of vulnerabilities remain in the nonbank financial sector; recovery is uneven in the corporate sector. Chapter 2 discusses the opportunities and challenges of the crypto ecosystem. Crypto asset providers’ lack of operational or cyber resilience poses risks, and significant data gaps imperil financial integrity. Crypto assets in emerging markets may accelerate dollarization risks. Chapter 3 shows that sustainable funds can support the global transition to a green economy but must be scaled up to have a major impact. It also discusses how a disorderly transition could disrupt the broader investment fund sector in the future.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial stability risks have been contained so far, reflecting ongoing policy support and a rebound in the global economy earlier this year. Chapter 1 explains that financial conditions have eased further in net in advanced economies but changed little in emerging markets. However, the optimism that propelled markets earlier in the year has faded on growing concerns about the strength of the global recovery, and ongoing supply chain disruptions intensified inflation concerns. Signs of stretched asset valuations in some market segments persist, and pockets of vulnerabilities remain in the nonbank financial sector; recovery is uneven in the corporate sector. Chapter 2 discusses the opportunities and challenges of the crypto ecosystem. Crypto asset providers’ lack of operational or cyber resilience poses risks, and significant data gaps imperil financial integrity. Crypto assets in emerging markets may accelerate dollarization risks. Chapter 3 shows that sustainable funds can support the global transition to a green economy but must be scaled up to have a major impact. It also discusses how a disorderly transition could disrupt the broader investment fund sector in the future.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial stability risks have been contained so far, reflecting ongoing policy support and a rebound in the global economy earlier this year. Chapter 1 explains that financial conditions have eased further in net in advanced economies but changed little in emerging markets. However, the optimism that propelled markets earlier in the year has faded on growing concerns about the strength of the global recovery, and ongoing supply chain disruptions intensified inflation concerns. Signs of stretched asset valuations in some market segments persist, and pockets of vulnerabilities remain in the nonbank financial sector; recovery is uneven in the corporate sector. Chapter 2 discusses the opportunities and challenges of the crypto ecosystem. Crypto asset providers’ lack of operational or cyber resilience poses risks, and significant data gaps imperil financial integrity. Crypto assets in emerging markets may accelerate dollarization risks. Chapter 3 shows that sustainable funds can support the global transition to a green economy but must be scaled up to have a major impact. It also discusses how a disorderly transition could disrupt the broader investment fund sector in the future.

Cristina Cuervo, Anastasiia Morozova, and Nobuyasu Sugimoto

bonds and bank deposits) by the issuers and service providers, which might have a negative impact on the broader financial sector, such as banks and bond markets. Market integrity risk . Many crypto assets are not backed by tangible assets or other securities (such as Bitcoin and Ether), and thus have no clear intrinsic value (differently from stablecoins). The price discovery function of the market is inevitably weak and therefore such assets are at high risk of market manipulation. 9 Anecdotal evidence suggests that some large crypto-trading platforms allow

Cristina Cuervo, Anastasiia Morozova, and Nobuyasu Sugimoto
The rapid growth of crypto assets has raised questions about the appropriate regulatory perimeter and the ability of the existing regulatory architecture to adapt to changing conditions. Effective regulation of financial services promotes long- term economic stability and minimizes the social costs and negative externalities from financial instability. The same underlying principles for regulation should apply to nascent products and services based on innovative technologies, notwithstanding design challenges.
International Monetary Fund. Monetary and Capital Markets Department

types of financial instrument under the Markets in Financial Instruments Directive (MiFID), a full set of EU financial rules apply. However, work by ESMA in 2019 9 suggested that only 10 to 30 percent of crypto-assets in existence at that time might be covered by MiFID. For crypto-assets that do not qualify as MiFID financial instruments (or that are outside the scope of other EU rules applicable to non-financial instruments, such as the Electronic Money Directive), consumer protection and market integrity risks can arise through the current absence of rules. The EC

Parma Bains, Arif Ismail, Fabiana Melo, and Nobuyasu Sugimoto

low-carbon economy. Other types of consensus mechanisms might generate concerns around security, transparency, or concentration. For example, although the shift from proof-of-work to proof-of-stake would improve energy efficiency and scalability, it could create excessive concentration of decision-making powers on crypto exchanges and wallet services providers, which may increase market integrity risks ( Agur and others 2022 ). Conversely, consensus in private blockchains may be faster and cheaper, but it may centralize the ecosystem, create new entities that could

Parma Bains, Arif Ismail, Fabiana Melo, and Nobuyasu Sugimoto
Unbacked crypto assets are the oldest and most popular type of crypto assets, relying not on any backing asset for value but instead on supply and demand. They were originally developed to democratize payments but are mostly used for speculation. Crypto assets were designed to disintermediate financial services, but centralized entities, such as exchanges and wallet providers, offer key functions to users and sustain the necessity of trust in one or several entities. At present, many of these entities are not covered by existing conduct, prudential, or payment regulations and can generate risks to market integrity, market conduct, and potential financial stability. We recommend that global bodies work to develop common taxonomies that can inform global and cross-sectoral standards while improving data insights. Standards should be risk-based, with greater requirements on entities and activities that generate more risk. Crypto asset service providers that deliver core functions and generate key risks should be licensed, registered, or authorized.
Parma Bains, Nobuyasu Sugimoto, and Christopher Wilson
BigTech firms are gradually entering the financial sector and becoming important service providers, particularly in emerging markets. BigTechs have entered financial services using platform-based technology to facilitate payments and more recently expanded into other areas, such as lending, asset management, and insurance services. They accumulate data from their nonfinancial and financial activities and draw on consumer data held in different parts of their business (such as via social media). BigTechs are applying new approaches to existing financial services products and services such as underwriting using big data and are also applying machine learning for their key business decisions, such as pricing and risk management across multiple financial sectors. Incumbent financial firms have also increased their reliance on BigTech firms to host core IT systems (for example, cloud-based services, which have the potential to improve efficiency and security). This rapid and significant expansion of BigTechs in financial services and their interconnectedness with financial service firms are potentially creating new channels of systemic risks. To achieve effective implementation and multiple objectives of financial regulation and supervision, a hybrid approach, combining a mix of entity- and activity-based approaches, is needed.