Virtual currencies (VCs) and Blockchain technology are a potentially important advance for the financial sector that could increase efficiency and financial inclusion, but can also serve as vehicles for money laundering, terrorism financing, and tax evasion. Achieving a balanced regulatory framework that guards against risks without suffocating innovation is a challenge that will require extensive international cooperation, says a new staff paper, “Virtual Currencies and Beyond: Initial Considerations,” released today by the International Monetary Fund (IMF) during the World Economic Forum.
“Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world,” said IMF Managing Director Christine Lagarde, who presented the report at the World Economic Forum, in Davos, during the panel Transformation of Finance. “The challenge will be how to reap all these benefits and at the same time prevent illegal uses, such as money laundering, terror financing, fraud, and even circumvention of capital controls.”
The report provides an overview of virtual currencies, how they work and how they fit into monetary systems, both domestically and internationally. It discusses the potential implications of the technological advances underlying virtual currencies, such as the Blockchain system, before examining the regulatory and policy challenges posed by VCs, in the areas of consumer protection, financial integrity (money laundering and terrorism financing), taxation, financial stability, exchange and capital controls and monetary policy. The paper also sets out principles for the design of regulatory frameworks for VCs at both the domestic and international levels.
A key conclusion of the paper is that the distributed ledger concept has the potential to change finance by reducing costs and allowing for deeper financial inclusion in the longer run. This could be especially important for remittances, where transaction costs can be high, around 8 percent. Distributed ledgers can also shorten the time required to settle securities transactions, which currently take up to three days, as well as lower counterparty and settlement risks.
The final synopsis was:
An important process will need to involve ongoing monitoring and analysis of the manner in which Virtual Currencies (VC) are evolving and the policy challenges that they pose. Many questions require further consideration. In particular, further work will be necessary in the following areas: How VC schemes and their underlying distributed ledger technologies will change existing business models in the financial sector, and what types of risk may arise from these developments, whether the application of distributed ledger technologies in the mainstream financial system will evolve in a manner that gives rise to new specific risks that require a regulatory response and what potential implications VC schemes may have for the IMF now and in the future.
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