Christine Lagarde – the head of the International Monetary Fund (IMF) – spoke in length about the crypto industry and its potential in the latest IMF Bulletin. Lagarde started out by comparing blockchain and cryptos to when Alexander Bell invented the telephone. Bell’s discovery was dismissed and laughed at by the largest telegram firm, highlighting that new technology is often laughed at in its youth. In her article titled “A Regulatory Approach to Fintech – Guarding Against Emerging Risks Without Stifling Innovation” Lagarde went on to praise the crypto world – a stark contrast to the warnings the IMF fired at the Marshall Islands earlier in the year.
Stop Creating FUD
There are so many FUDlers out there, spreading negative sentiment about the crypto world and trying to scare off the market. Whether this is for their own personal gains, they don’t understand it, or simply have an axe to grind, these people are best to be ignored – and Lagarde agrees.
Today, some enthusiasts say crypto-assets may represent the beginning of a similar breakthrough. Others condemn crypto-assets as little more than a fad or a fraud. We should not dismiss them so lightly. Crypto-assets are just one example of how new technologies are being used to deliver financial services.
Still Some Risk Attached
Lagarde doesn’t hold back any punches, she weighed in on both positive and negative aspects of this new technology in a very balanced article. Lagarde highlighted the point that while the technology enables for faster, cheaper and more secure transactions, as well as secure storage of data, that it has been used for illicit purposes in the past. She isn’t wrong, but hasn’t the phone also been used for illicit purposes? Criminals are always going to look for the upper hand when committing a crime, so using this powerful tech is a clear way forward for them.
Financial technology offers considerable promise, but it also poses risks. Consider distributed ledger technology, which underpins crypto-assets. It can enable faster and cheaper transactions, store records securely, and execute so-called smart contracts automatically. But, the technology has also been used for illicit purposes.
Thankfully, the US Drug Enforcement Agency (DEA) has said that illicit transactions in Bitcoin are starting to decline and only account for around 10% of all transactions completed with the cryptocurrency. This coupled with the fact the DEA can trace all transactions in most cryptos make it harder for criminals to use, forcing them to revert back to cash transactions.
Regulators Have a Tough Road Ahead
As Lagarde went on, she began to point out the difficulties regulators have ahead of them. If regulators create sweeping regulations that are designed to protect investors in a similar way to current laws for the traditional investment industry it could stifle growth and innovation. However, if regulators lean too far the other way and make fairly lax regulations, then more scams could sneak through the cracks and investors could be left at risks. Whichever way you look at the situation, there is a tough road ahead for regulators. Malta appears to have the perfect balance between investor protection and corporate ease, but its crypto-friendly laws have only been live a handful of days.
Regulators face a difficult task. On the one hand, they must protect consumers and investors against fraud and combat tax evasion, money laundering and the financing of terrorism. They must also protect the integrity and stability of the financial system. On the other, they must beware of stifling innovation that benefits the public. By engaging with market participants at the center of financial innovation, regulators can stay abreast of the benefits of new technologies and identify risks. developing a forward-looking regulatory framework calls for creativity, flexibility, and new expertise.
Keep an Open Mind
To round off her article, Lagarde reminds readers to keep an open mind towards the industry. It’s still in its infancy and therefore will have some teething issues, but its future remains bright. She urges people who are fearing the industry to think back to Alexander Bell and the telephone – give it time and it will eventually make our lives easier.
Above all, we must keep an open mind about crypto-assets and fintech, not only because of the risks they pose, but also because of their potential to improve our lives. When in doubt, think of Bell and his telephone.
While Lagarde isn’t known to be the biggest supporter of blockchain technology and cryptocurrencies, this article is certainly a boost for the industry. There is a lot of FUD talk circling around, and with all the hacks happening at the moment you can see why. Keep pushing ahead and creating practical use cases for this new technology and eventually we will see it in everything from driving cars to switching off the light at night. You can read Lagarde’s full article here.