Leaving the Wild West: Taming Crypto and Unleashing Blockchain

Leaving the Wild West: Mastering Cryptocurrencies and Liberating Blockchain

December 13, 2023

(As prepared for delivery)

Hello!

I have been looking forward to visiting Korea as Managing Director of the IMF for quite some time and am delighted that it will take place when I can join the important discussions on digital currency that will take place during this conference. My deepest thanks to Vice Premier Choo, FSC Vice Chairman Kim, and my dear friend Chang Yong, Governor Rhee, with whom I worked closely at the IMF.

Like in the old days, when guests arrived from distant lands and crowded around a crackling fire, let me tell you a story.

It is a story of past, future and present. It is a story of innovators and lawbreakers, of risks and opportunities. It is the history of cryptocurrencies and blockchain.

Past

We begin with what seems like the dusty Wild West of American history.

Most cryptoassets arrived on the financial scene “unsupported” or “poorly supported,” lacking intrinsic value and suffering from price volatility. Some of them collapsed due to their dependence on unstable reserves.

Cryptoassets were really risky assets—many homes have scars to prove it. They lost real money. Lots.

The Wild West was a tough place. With few sheriffs and limited legislation and regulation, it was a land of accidents and criminals. Money laundering and other illicit activities have been estimated at tens of billions of dollars annually.

Just last month, the founder of Binance, the world's largest cryptocurrency exchange, pleaded guilty to money laundering charges, just after the founder of FTX, a prominent exchange that collapsed, was found guilty of fraud and other charges. crimes.

Simply put, in the last 15 years, the crypto industry has not earned a glorious reputation. He's not out of the woods either.

Future

Where could I go? Let's look to the future.

We must consider the effects if cryptoassets became widespread. The scenario is not far-fetched.

On the one hand, cryptoassets are not going away. Bitcoin is trading at its highest value since April 2022. The crypto market capitalization has doubled over the past year. And still today people search for the word "Bitcoin" about 20 times more than "health and wellness" and 7 times more than "climate change."

Furthermore, according to Chainalysis, adoption of cryptoassets is high, especially in emerging market economies such as India, Nigeria, and Vietnam, although data is scarce. In Brazil, for every 100 reais spent on foreign securities, 25 go to cryptoassets, according to ongoing research by IMF staff.

The challenge is that high adoption of cryptoassets could undermine macro-financial stability.

On the one hand, as our recent article shows, cryptoization (the use of a cryptoasset instead of national currency) can undermine the transmission of monetary policy. What's the point of raising interest rates on a currency that few people own?

Additionally, capital flow management measures, such as limits on foreign currency holdings, could be circumvented.

And cryptocurrencies could undermine fiscal sustainability if tax collections became volatile or more difficult to enforce.

That is a future we all want to avoid.

Present

To find out how, let's return to the present and go from the Wild West to East Asia to learn from the rich traditions of Korea.

Hangul inspires me. For my fellow visitors, this is the writing system of the Korean language introduced in the 15th century.^th century by King Sejong. Its simple structure replaced an inefficient writing system only accessible to elites. From ancient scripts to smartphones, Hangul has proven to be incredibly adaptable. And it is beautiful.

Hangul is the perfect public good, with clear rules to build syllables and words, and minimal but solid infrastructure—an alphabet of 24 letters.

This is similar to what we are trying to achieve today. Our goal is to make a more efficient, interoperable and accessible financial system by providing rules to avoid the risks of cryptocurrencies, and infrastructure taking advantage of some of its technologies. Let's look at each one.

Rules for crypto

After insightful discussions with member countries, the IMF and the Financial Stability Board published a report Last September it offered guidance on the rules for crypto assets.

Among the main elements: not converting crypto assets into legal tender or official currencies. Clarify and consistently apply laws, standards and regulations, including to combat money laundering and terrorist financing. Establish clear tax rules. Provide a solid legal basis with a clear classification of cryptoassets. And coordinate policies globally to avoid regulatory arbitrage, as cryptoasset providers can relocate with the click of a button.

Countries are implementing this guidance: turning it into legislation, training supervisors and supervisors, and enforcing compliance. Korea, for example, is showing leadership by amending its anti-money laundering law and establishing new cryptoasset legislation. The FSB and IMF are helping member countries on all these fronts and we are ready to do more.

These rules are not intended to return us to a pre-crypto world or stifle innovation. Not everything in crypto was tainted by fraud, just as the Wild West was not all about criminals, despite their legendary exploits.

Infrastructure exploration by the private sector.

Good rules can stimulate and guide innovation. For example, banks are exploring new business infrastructures using blockchain technology refined and popularized by the rise of cryptocurrencies. They hope to reduce costs and speed up daily transactions of trillions of dollars' worth of assets, and expand financial access to those currently content with low-performing deposit accounts.

Today, banks create a paper asset, deposit it in the hands of a custodian, and send messages to intermediaries so that each can reconcile their version of who owns what. It works, but it's expensive. Instead, imagine establishing the asset as an entry or “token” on a blockchain and trading it by updating the blockchain.

The potential gains could be large: the blockchain can be accessed by all transacting parties, it is transparent and tamper-proof, and settlement is fast. Financial assets in symbolic form can also be divided into parts to serve smaller investors. And transactions can be automated and grouped to occur simultaneously. This reduces the risk of counterparties or transactions failing before an asset reaches its rightful owner.

I saw it with my own eyes last month, in banking pilot projects under the Monetary Authority of Singapore's Guardian Project.

To be clear, many hurdles still need to be overcome to move from pilot projects to production, such as establishing appropriate legal frameworks.

Public infrastructure

While we cannot predict adoption, we must be prepared. Planning the right infrastructure is key.

That's where the public sector comes in: to ensure that this infrastructure meets public policy objectives.

The blockchains I just described will need to be cheap, stable and reliable. They must guarantee interoperability between assets and contracts to market them. They will need secure money that is also on-chain (central bank digital currencies) to pay for the assets. And compliance with international standards such as the fight against money laundering and the financing of terrorism will be paramount, as will coherence with countries' political priorities, such as the management of capital flows.

Not coincidentally, this sounds like the platforms that described at the Singapore Fintech Festival-those virtual plazas that facilitate transactions. There I focused on how Platforms favor the interoperability of currencies, while today we are discussing the interoperability of assets. After all, money is a financial contract (an IOU) like any other asset. Whether we want to fix cross-border payments or ensure the efficiency and stability of asset transactions, we end up in the same place.

Conclusion

Rules and infrastructure may well be the consonants and vowels of tomorrow's international monetary system. They must be as sensible and farsighted as Hangul!

The great Korean philosopher and public servant Yulgok said: “If one practices with all his strength, he can achieve efficiency and then obtain results.” Let's do it. Gamsa-hamnida!