IMF Global Financial Stability Report
On April 19, the IMF issued its semiannual Global Financial Stability Report to share the IMF’s assessments concerning the stability of global financial markets. But this time, the report devoted an entire chapter to the rise of fintech, and specifically analyzed the enormous growth of DeFi.
The report does take note of DeFi’s promising future, stating that “DeFi has the potential to offer financial services with even greater efficiency, becoming a gravitational force that attracts a large number of crypto investors.” However, the report also argues that DeFi may increase risks in the financial sector because of the difficulty regulators will face imposing regulation on a disintermediated financial system.
The IMF calls for “enhanced regulatory surveillance and globally consistent regulatory frameworks” to reduce the alleged systemic risks posed by DeFi. To meet these regulatory goals, the report argues that regulation should focus on centralized players that facilitate access to DeFi, such as centralized exchanges and stablecoin issuers. They argue that these centralized players could be an “effective liaison for regulators to address the risk of rapid DeFi growth.”
Another suggestion the IMF makes in order to “manage the risks generated by protocol developers” is to create public-private collaborations on code regulation that would generate standards around either the actual development of code or around code-reviewing best practices and code audits.
Finally, the report calls for robust governance self-regulatory organizations (SROs). These SROs would be responsible for creating standards to improve risk management and facilitate best practices for security initiatives. These SROs would also, in theory, serve as natural points of contact for regulators.
What does this mean?
Inclusion of DeFi in this report is yet another indicator that regulators across the globe are starting to take notice of DeFi in a big way. This report in particular is an instance of an enormously influential, international organization discussing in print the many ways DeFi can improve financial services by reducing the costs of intermediation, distributing value directly to users, and increasing access to financial services.
That said, some of the suggestions made in the report are concerning. While self-regulatory organizations may be an effective way to create best practices in DeFi, censoring the types of code a developer can create isn’t a path anyone should want to go down, not to mention that idea’s questionable constitutionality.
Nonetheless, the IMF’s suggestion that a self-regulatory organization would be the best way to create security best practices is a good idea, especially given the increasing amount of assets stolen via hacks in the noncustodial ecosystem and the scrutiny they’re generating.
Argentina Creates Crypto Regulatory Sandbox
The Argentinian National Securities Commission has created an “innovation hub” to facilitate further innovation in the fintech and crypto spaces. The hub will act as a bridge between regulators and private entities, with the goal of creating regulatory clarity for fintech and crypto startups as they seek to grow and build their businesses in Argentina.
Andrés Consentino, the President of the CNV, was quoted as stating: “We are being proactive in the context of the emergence of [crypto-related] companies and fintech firms. [We want] to work together with the sector and generate a regulatory and policy framework.”
With this innovation hub, Argentina joins other countries like the U.K. and Canada who have recently created regulatory sandboxes to facilitate crypto and DeFi innovation.
What does this mean?
Sandboxes create innovation-friendly zones in which developers can work with governments under conditions that facilitate regulatory clarity and encourage collaboration. The more these groups communicate and understand each other, the better. In addition, these regulatory sandboxes raise the cost of bad or inconsistent regulation in other countries. If there is an attractive and clear regulatory framework in a country, developers will naturally gravitate to them.
Mining Environmental Concerns Remain Acute
Rep. Jared Huffman (D-CA), along with 22 other Democratic members of Congress, sent a letter to the EPA requesting that the EPA ensure that crypto mining facilities are in compliance with the Clean Air Act and the Clean Water Act.
The letter expressed these representatives’ concern over the environmental impacts of Proof of Work systems. In particular, the representatives voiced their belief that increased energy usage by crypto mining will lead to old, environmentally unsafe coal plants being brought back online in order to meet energy needs.
What does this mean?
Whatever one thinks of the merits of environmental concerns over mining, the issue isn’t going away. New York lawmakers are actively considering restrictions on PoW, and the European Parliament voted down (by a very slim margin) a similar policy last month.
Not only is PoW’s energy mix greener than almost every other major industry, but also mining can be used to incentivize generation (including renewables) that otherwise couldn’t be built without the long-term guaranteed revenues that miners can commit to.
If New York, for example, restricts PoW, miners will move to the many jurisdictions actively courting them, which means PoW bans will have no net environmental benefits. Jurisdictions like Texas, which notoriously has acute spikes in energy demand above its grid’s normal capacity, are actively considering how mining can make additional capacity economical while also flexible. In essence, miners can pare back their operations rapidly and easily to free up capacity when power demand is exceptionally acute (which is often a few days a year). Given all of these facts, what’s going on? In our experience, the drive to curtail PoW operations often signals deeper concerns about (or outright opposition to) disintermediation and cryptocurrencies.