Crypto Assets Creating New Financial Vulnerabilities

With the introduction of Bitcoin and a host of other cryptocurrencies, the age of digital assets began and experts started predicting how such assets will rapidly grow to be a major part of global wealth in the future. (Image:  pixabay /  CC0 1.0)
With the introduction of Bitcoin and a host of other cryptocurrencies, the age of digital assets began and experts started predicting how such assets will rapidly grow to be a major part of global wealth in the future. (Image: pixabay / CC0 1.0)

Until cryptocurrencies were introduced, an asset largely referred to something physical — like gold, paper money, real estate, and so on. With the introduction of Bitcoin and a host of other cryptocurrencies, the age of digital assets began and experts started predicting how such assets will rapidly grow to be a major part of global wealth in the future. But a new report by the International Monetary Fund (IMF) indicates that such a turn of events might not be a good thing.  

IMF warning

The craze over cryptocurrencies was evident in 2017 when Bitcoin surged from about US$1,000 at the start of the year to nearly US$20,000 by the year-end. But as with all financial frenzies, the rapid rise of Bitcoin was followed by a sharp fall, with prices hovering around US$6,500 as of October 2018.

Such massive price swings caught the attention of the IMF, which said in its World Economic Outlook report that the “continued rapid growth of crypto assets could create new vulnerabilities in the international financial system,”  according to Forbes.

The IMF also warns about cyber-attacks on the financial infrastructure as an additional risk. Large-scale cybersecurity breaches have the potential to undermine cross-border payment systems and disrupt the flow of goods and services.    

IMF also warns about cyber-attacks on the financial infrastructure as an additional risk. (Image: pixabay / CC0 1.0)

IMF also warns about cyber-attacks on the financial infrastructure as an additional risk. (Image: pixabay / CC0 1.0)

“Stealing cryptocurrencies is similar to stealing cash, and exchanges will continue to be targeted by hacking attacks in the long-term. It is as important to establish systems to deal with the aftermath of hacking attacks as integrating various methods to prevent hacking attacks,” said Jeon Ha-jin, the chairman of South Korea Blockchain Association (CNN).

Regulating crypto markets

Governments across the world are undecided on the matter of cryptocurrencies. While some are okay with accepting cryptos as legal currencies, some wish to ban it. However, in February this year, IMF Chief Christine Lagarde made it clear that the organization’s biggest concern with cryptocurrencies is their potential use in illicit financial activities and that state regulation on crypto markets is “inevitable.”

The anonymity offered by virtual currencies seem to attract a lot of money launderers and terrorists to use cryptocurrencies for financial transactions. Branding the world of cryptocurrencies as the “Wild West,” the U.K. government has recommended handing the regulatory oversight of the industry to its Financial Services Authority. The U.S. administration also wants to put in place a strong set of regulations for crypto markets.

IMF Chief Christine Lagarde made it clear that the organization’s biggest concern with cryptocurrencies is their potential use in illicit financial activities and that state regulation on crypto markets is ‘inevitable.’ (Image: medef via flickr CC BY-SA 2.0)

“My number-one focus on cryptocurrencies, whether that be digital currencies or Bitcoin or other things, is that we want to make sure that they’re not used for illicit activities… We encourage Fintech and we encourage innovation, but we want to make sure all of our financial markets are safe… We want to make sure that the rest of the world — and many of the (Group of) 20 countries are already starting on this — have the same regulations,” said U.S. Treasury Secretary Steven Mnuchin (Reuters).

The United States government already requires virtual currency platforms based in the country to comply with anti-money laundering rules and file a report in case any suspicious transactions are detected. As per estimates, almost 100 platforms are currently registered with the U.S. Treasury’s Financial Crime Enforcement Network. 

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