Speech

Leaving the Wild West: Taming Crypto and Unleashing Blockchain

December 13, 2023

(As prepared for delivery)

Annyeong haseyo!

I have been looking forward to visiting Korea as Managing Director of the IMF for quite some time and am delighted it is taking place when I can join the important discussions on digital currency that will take place during this conference. My deepest gratitude goes to Deputy Prime Minister Choo, FSC Vice-Chairman Kim, and my dear friend Chang Yong—Governor Rhee—with whom I worked closely at the IMF.

As in old times when guests arrived from distant lands and huddled around a roaring fire, allow me to tell you a story.

It is a story of past, future, and present. It is a story of innovators and lawbreakers, of risks and opportunity. It is the story of crypto and blockchain.

Past

We begin with what feels like the dusty Wild West of American history.

Most crypto assets arrived on the financial scene “unbacked” or “poorly-backed” — lacking intrinsic value and suffering from price volatility. Some of them collapsed because of reliance on shaky reserves.

Crypto assets were really risky assets—many households have the scars to prove it. They lost real money. Lots of it.

The Wild West was a tough place. With few sheriffs around, and limited legislation and regulation, it was a land of crashes and criminals. Money laundering and other illicit activity has been estimated in the tens of billions of dollars per year.

Just last month, the founder of Binance, the world’s largest crypto currency exchange, pleaded guilty to charges of money laundering—right after the founder of FTX, a prominent exchange that crashed, was convicted of fraud and other crimes.

Put simply, in the past 15 years, the crypto industry has not built a glorious reputation. Nor is it out of the woods.

Future

Where might it go? Let’s look towards the future.

We must consider the effects if crypto assets became widespread. The scenario is not farfetched.

For one, crypto assets are not going away. Bitcoin is trading at its highest value since April 2022. The crypto market cap doubled over the last year. And still today people search for the word “Bitcoin” about 20 times more than “health and wellness,” and 7 times more than “climate change.”

Also, crypto asset adoption is high especially in emerging market economies like India, Nigeria, and Vietnam, according to Chainalysis, though data is scarce. In Brazil, for every 100 real spent on foreign securities 25 go into crypto assets, according to ongoing research by IMF staff.

The challenge is that high crypto asset adoption could undermine macro-financial stability.

For one, as our recent paper shows, crypto-ization—the use of a crypto asset instead of domestic currency—can undermine monetary policy transmission. What use is it to raise interest rates on a currency few people hold?

In addition, capital flow management measures—such as limits on foreign currency holdings—could be circumvented.

And crypto could undermine fiscal sustainability if tax collection became volatile or more difficult to enforce.

That is a future we all want to avoid.

Present

To figure out how, let’s return to the present—and go from the Wild West to East Asia, to learn from the rich traditions of Korea.

I’m inspired by Hangul. For my fellow visitors, this is the writing system of the Korean language introduced in the 15^th century by King Sejong. Its simple structure replaced an inefficient writing system only accessible to elites. From ancient scripts to smartphones, Hangul has proven incredibly adaptable. And it is beautiful.

Hangul is the perfect public good, with clear rules to construct syllables and words, and minimal yet solid infrastructure—an alphabet of 24 letters.

This is similar to what we’re trying to accomplish today. Our goal is to make a more efficient, interoperable, and accessible financial system by providing rules to avoid the risks of crypto, and infrastructure by leveraging some of its technologies. Let’s look at each.

Rules for crypto

After enlightening discussions with member countries, the IMF and the Financial Stability Board published a report last September offering guidance on rules for crypto assets.

Among the main elements: do not make crypto assets legal tender or official currencies. Clarify and consistently apply laws, standards, and regulations including for anti-money laundering and financing terrorism. Establish clear tax rules. Provide a solid legal foundation with a clear classification of crypto assets. And coordinate policies globally to avoid regulatory arbitrage, since crypto asset providers can relocate at the click of a button.

Countries are implementing this guidance—turning it into legislation, training supervisors and overseers, and enforcing compliance. Korea, for instance, is showing leadership by amending its anti-money laundering law and setting up new legislation on crypto assets. The FSB and IMF are helping members on all these fronts—and we stand ready to do more.

These rules are not meant to return us to a pre-crypto world, nor to squash innovation. Not all in crypto was tainted by fraud, just like the Wild West was not only about crooks, despite their legendary exploits.

Private sector exploration of infrastructure

Good rules can spur and guide innovation. For instance, banks are exploring new trading infrastructure using blockchain technology refined and popularized by the crypto boom. They hope to cut costs and boost speed for trillions of dollars of daily asset transactions, and to broaden financial access to those currently content with low yielding deposit accounts.

Today, banks create an asset in paper form, deposit it with a custodian, and message intermediaries so each may reconcile its version of who owns what. It works, but it’s expensive. Instead, imagine establishing the asset as an entry, or “token,” on a blockchain, and trading it by updating the blockchain.

Potential gains could be large: The blockchain is accessible by all transacting parties, it is transparent and tamper-proof, and settlement is fast. Financial assets in token form can also be divided into parts to serve smaller investors. And transactions can be automated and bundled to occur simultaneously. This lowers the risk that counterparties or trades fail before an asset gets to its rightful owner.

I saw this with my own eyes last month, in bank pilots under the Monetary Authority of Singapore’s Project Guardian.

To be clear, many hurdles must still be overcome to go from pilots to production, such as establishing adequate legal frameworks.

Public infrastructure

While we cannot predict adoption, we must be ready. Planning the right infrastructure is key.

That’s where the public sector comes in – to ensure that this infrastructure meets public policy objectives.

The blockchains I just described will need to be cheap, stable, and trusted. They must ensure interoperability between assets and the contracts to trade them. They will require safe money that is also on chain—central bank digital currencies—to pay for assets. And compliance with international standards such as anti-money laundering and terrorist financing will be paramount, as will consistency with countries’ policy priorities, like managing capital flows.

No coincidence, this sounds like the platforms I described at the Singapore Fintech Festival—those virtual town-squares facilitating transactions. There, I focused on how platforms favor the interoperability of currencies, while today we’re discussing the interoperability of assets. After all, money is a financial contract—an I.O.U.—just like any other asset. Whether we want to fix cross-border payments, or ensure the efficiency and stability of asset transactions, we end up in the same place.

Conclusion

Rules and infrastructure may well be the consonants and vowels of tomorrow’s international monetary system. They need to be as sensible and far-sighted as Hangul! 

The great Korean philosopher and public servant Yulgok said, “If one practices with all one's strength, one can reach efficiency and then obtain results.” Let’s do it. Gamsa-hamnida!