IMF warns of the danger to the financial system from ‘disappearing’ crypto coins and the instability of stablecoins

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The IMF warned countries about the risks that came with the growing crypto space in a report Tuesday.
More than 16,000 tokens have been listed on exchanges, but only around 9,000 exist today, the report said.
The fund said stablecoins were vulnerable to volatility and investor runs despite being pegged to another asset.
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The International Monetary Fund (IMF) has issued a warning about the growing risks in the expanding cryptocurrency space, including fraud, excess speculation and potential “runs” on seemingly more stable assets, in a report on Tuesday.

Crypto in all its forms, such as digital coins like bitcoin and stablecoins like the USDC, has been spreading around the globe. Nearly half of the world’s central banks have looked into creating their own digital currencies, which would be centralized and be more secure than pure cryptocurrencies.

“Investor protection risks loom large for crypto assets and decentralized finance,” the report said in the executive summary document.

More than 16,000 tokens have been listed on various exchanges like Coinbase, Binance and Kraken over time, but only around 9,000 exist today, the report said. Some of these tokens were purely speculative and impacted solely by social media trends.

“Investors are – likely to face losses from tokens ceasing to exist-something that is less common in regulated securities markets,” the IMF said.

Some countries such as Argentina, Mexico and Thailand have stopped exchanges from offering tokens that display particular characteristics, the report said. Regulators around the world have stepped up their oversight of the crypto market, while some commercial banks have stopped their customers from transferring money to certain crypto exchanges.

China’s recent banning of all crypto mining and trading is the harshest example so far of the kind of pressure the sector can come under.

Another factor the IMF emphasized was stablecoins, which are pegged to an underlying asset such as cash or bonds, were vulnerable to volatility and investor runs.

A few months ago, investors saw the value of a decentralized finance token called titan, which was part of an algorithmic stablecoin project from Iron Finance, drop in hours from around $60 to a tiny fraction of a cent. Whale accounts unloaded their shares and triggered the equivalent of a bank run, as smaller traders rushed to recoup their money. The meltdown even caught billionaire Mark Cuban off guard. “I got hit like everyone else,” he tweeted at the time.

“An investor run in one country can also lead to cross-border spillovers if large global crypto exchanges are involved. The concentrated ownership of stablecoins by market makers could also trigger wider contagion,” the report said.

Stablecoins have also come under fire on account of the composition of their reserves – the most prominent so far is the tether token, which claimed to be fully backed by US dollars, but is largely backed by short-term corporate debt.

The IMF recommended countries collaborate to address the technological, legal, regulatory, and supervisory challenges that crypto assets can bring.

“Where standards have not yet been developed, regulators need to use existing tools to control risk and implement a flexible framework for crypto assets,” the report said.

The IMF said central bank digital currencies could resolve some of the stability and transparency issues around the crypto market.

Read the original article on Business Insider

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