The International Monetary Fund (IMF) has declared that the Proof of Stake (PoS) consensus mechanism risks giving excessive concentration of decision-making powers to crypto exchanges.
In its recent paper, IMF has addressed the cases of unbacked crypto assets and has made suggestions for a regulatory framework for tackling global digital asset risks.
IMF highlighted how PoS can create an ‘excessive concentration of decision-making powers on crypto exchanges and wallet services providers’, and this in turn can aggravate market integrity risks in spite of the potential energy savings.
The paper elaborated on proof-of-work (PoW) mining, which consumes significant energy, and can thwart the global objective of transitioning to a low-carbon economy.
Through the paper, the IMF said that even though regulators must take a “technology-neutral approach”, they should also consider the regulatory implications of different forms of technology.
This is because some types of consensus mechanisms underpinning blockchains may inherently generate friction with ‘broader policy objectives and mandates’ saying a “technology-neutral approach may not be sustainable going forward”.
The report also said that the Financial Stability Board (FSB) can step up and coordinate and establish global standards to support national regulation of crypto assets.
The report pointed out that financial stability perils of crypto assets may still not be globally systemic. But this is changing with the growing systemic implications that are visible in few countries. It identified a significant jump in the correlation between crypto assets and financial assets during times of market stress, drawing from its own research.
The paper mentions key steps like significant centralized entities involved in core functions must be licensed and authorized.
It also says that authorities might want to take into account the risks around “volatility, market awareness, product knowledge and understanding”, and how the crypto assets are used.
The IMF stressed upon the importance of international collaboration, by stating that “cross-sector and cross-border dimensions of crypto assets make domestic and international coordination and cooperation key,” more so than “in the case of many traditional financial activities.”
Hence, close international cooperation is needed to address regulatory bridges and prevent regulatory arbitrage. Consistent regulatory approaches can avoid probable threats of ‘a race to the bottom by regulators and policymakers’ and can deal with regulatory arbitrage by financial entities.
Amidst all the emphasis on regulation, IMF says that regulations must not be thought of as a stifling innovation but rather as building trust.