IMF: A surge in crypto trading in emerging markets, and the potential use of crypto mining to evade sanctions, both are a threat to the global financial system.

In its Global Financial Stability Report for April 2022, the IMF has warned of the threats that ‘cryptoization’ could pose to the global financial system if crypto trading surged in emerging markets and countries such as Russia and Iran used their trapped energy to mine cryptos and undermine sanctions. (Financial Express)

The IMF has been alerted by the surge in trading volumes of the Tether stablecoin against emerging economies (notably Turkey) due to economic turmoil or heightened trading by residents, and against the Russian rouble and Ukrainian hryvnia at the end of February after the Ukraine war broke out.

Though a pointer to the future, the IMF hastened to clarify that “liquidity in the ruble and hryvnia trading pairs in centralized exchanges remains limited and has even declined more recently in the case of the ruble, making large-scale transfers of value through crypto-asset exchanges impractical.”

Nevertheless, the IMF sounded the alarm bells on lax systems that could allow circumvention of checks and balances:

“The crypto ecosystem, however, could allow users to circumvent such requirements through several means, including (1) the use of exchanges and other crypto asset providers that are non-compliant with sanctions and/or capital flow management measures; (2) poor implementation of adequate due diligence procedures by crypto asset providers; and (3) the use of technologies and platforms that increase the anonymity of transactions (such as mixers, decentralized exchanges, and privacy coins).”

The IMF also is apprehensive that sanctioned countries such as Iran and Russia could evade sanctions by using their energy resources to conduct crypto mining.

“Mining for energy-intensive blockchains like Bitcoin can allow countries to monetize energy resources, some of which cannot be exported due to sanctions,” the IMF wrote. “The monetization happens directly on blockchains and outside the financial system where the sanctions are implemented. Miners can also generate revenues directly from users that pay transaction fees to miners (which in this case might be sanctioned governments).”

“At this point, the share of mining in countries under sanctions and the overall size of mining revenues suggests that the magnitude of such flows is relatively contained, although risks to financial integrity remain.”

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