Cryptoization is posing unprecedented threats to global financial stability. Here's how!

Cryptocurrency has opened a new world of opportunities. The emergence of digital assets and their rapid growth can lead to the 'cryptoization' of the local economies, which could undermine the exchanges and capital controls, threatening global financial stability.

With the rising use of digital assets, the need for crypto exchanges, wallet systems, stablecoin issuers is also on the rise. Several of these entities lack strong operational governance and risk practices. Crypto exchanges have faced significant disruptions during market turbulence, like during high-profile hacking incidents. But despite these, cryptocurrency has yet, not faced any severe challenges. The growing use of digital assets is because it is a cheaper and quicker method to perform transactions.

What's at risk?

According to International Monetary Fund (IMF), the growth of digital assets has put consumer protection at risk. The anonymity of crypto assets creates a gap where crypto regulators generally fail, making a clear path for money laundering and terrorist financing. Regulatory organizations can only track the transactions but not the parties involved in them.

IMF also warns that in the future, the widespread and rapid adoption of cryptocurrency can enforce significant challenges like cryptoization, where the citizens of a country start using digital assets instead of the local or fiat currency. El Salvador has already become the first country to adopt bitcoin as the legal tender, with supporters claiming that this experiment would lower costs by billions of dollars for remittances.

The organization states that the exact level of adoption of crypto in developing countries is still difficult to estimate. Various factors such as the low credibility of central banks and weak domestic banking can act as catalysts to the growing crypto adoption.

Cryptoization also poses a threat to fiscal policies, as digital assets can facilitate tax evasion. It can also instigate capital outflows that will disrupt the foreign exchange market.

Regulators and policy-makers should prioritize the implementation of global crypto standards. Regulations should be re-evaluated to monitor recent developments in the crypto ecosystem and the risks they create. Policymakers should also prioritize making cross-border transactions faster, cheaper, and more inclusive.