IMF paper proposes framework to assess systemic risk from crypto assets

Quick Take

  • IMF paper proposes a framework to help global jurisdictions assess systemic risks associated with crypto assets.
  • The IMF paper added that empirical tools from traditional finance are not well suited for crypto-related risk assessment.

An International Monetary Fund (IMF) paper has proposed a framework for "understanding and tracking systemic risks stemming from crypto assets."

The framework sets out tools to assist policymakers and regulatory authorities in containing potential risks from the crypto sector. The IMF paper, called Assessing Macrofinancial Risks from Crypto Assets, emphasized the importance of integrating these tools into existing regulatory and systemic risk assessment processes. 

"Our aim is to highlight the channels through which crypto assets could amplify any turmoil in the crypto world into systemic risk," the paper said.

IMF's proposed framework

The paper proposed a crypto risk assessment matrix (C-RAM), that would assess global risks. "The global C-RAM identifies global risks that would be exogenous to countries and have implications for macro-financial stability," the paper added.

The second purpose of the framework is to serve as a tool for identifying areas of prudential risk associated with crypto assets within jurisdictions. "The country-level analysis highlights vulnerabilities and risks, analyzes potential triggers leading to systemic risk, and proposes potential policy tools," the paper said.

The framework takes a three-step approach. The first step involves a decision tree that assesses how critically important the crypto sector is to a national economy. The second step involves examining indicators, similar to those used in traditional finance, that indicate the potential for systemic risk. The third step covers the global macro-financial risk from crypto assets that could have implications for a country’s systemic risk assessment.


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Expansion of crypto assets

The paper added that crypto assets now represent an important component of the international financial sector. "Linkages of crypto assets with the rest of the economy are still limited but are being established rapidly as crypto assets become more widely used," the paper said.

Various advantages of crypto assets were outlined in the study: more efficient payment systems, faster cross-border transactions, reduced transaction costs, and increased financial inclusion. However, it stressed there is a risk of "dire consequences" if the crypto sector lacks thorough regulatory and policy frameworks.

The paper highlighted specific vulnerabilities that could pose systemic risks to the broader financial sector and the economy. These risks include leveraged exposure within crypto markets that could introduce additional vulnerabilities spilling over to the rest of the economy.

The paper highlighted corporate exposure to crypto assets due to their integration into payment systems and supply chains, which could potentially create a risk channel. The paper also added that this integration would make exposed corporations more vulnerable in terms of profitability, asset-to-liability mismatches, and cash flows.

The IMF paper added that many of the empirical tools currently used for systemic risk analysis in traditional finance, "do not incorporate crypto-related indicators or are not well suited for crypto-related risks."

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

About Author

Brian McGleenon is a UK-based markets reporter for The Block. He has worked as a financial journalist and producer for multiple news outlets over the years, such as Fuji Television, The Independent, Yahoo Finance, The Evening Standard, and The Daily Express. Brian is also a screenwriter and producer with one feature film produced and one in development with Northern Ireland Screen. Apart from web3 and cryptocurrency developments, he is also interested in geopolitics, environmental issues, artificial intelligence, and longevity research. Get in touch via email [email protected].


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