Sep 11, 2023 - Economy

Where "cryptoization" could thrive

Illustration of a glowing Earth in the shape of a block.

Illustration: Shoshana Gordon/Axios

"Cryptoization" is a word used by the International Monetary Fund and the Financial Stability Board to describe a theoretical process in which citizens of some country begin to prefer cryptocurrency over the sovereign's money.

Driving the news: The word appears in a new report, jointly issued by the two international bodies, aimed at synthesizing global regulation of the crypto industry.

What they're saying: "The risk of currency substitution ('cryptoization') is particularly pertinent for countries with unstable currencies and weak monetary frameworks," the authors write.

Details: It's not hard to read the above statement as the IMF and FSB largely making the same sort of case that global bodies have been making all along: Get your financial house in order, and everything else will take care of itself.

  • "Weak monetary policy frameworks, combined with fiscal deficits and pressures for central bank financing, undermine monetary credibility and instigate currency substitution," the report said.

On the other hand: Bans aren't worth the trouble, the report argues. In fact, they probably won't work, but they will waste energy and perhaps export trouble to neighbors.

  • Targeted restrictions on specific problematic activities might sometimes make sense, however.
  • Instead, the report encourages clear rules. For example, it argues that countries should detail precisely how their tax laws deal with crypto assets, whether it's an income-based arrangement or a value-added tax.

The report took particular aim at stablecoins, reiterating the push for countries to get aligned with each other in terms of how they handle stablecoins and limit the potential for those instruments to create shocks to the global system.

What we're watching: The report hinted at research into some of the more sophisticated bits of the industry. For example, it compares decentralized finance with traditional finance, and it addresses maximal extractable value (MEV).

  • MEV is a revenue stream for block validators that allows them to squeeze a little (or a lot) of extra revenue from traders by allowing them to pay to jump the line.
  • But the report's authors frowned upon the practice. "On distributed ledgers, users generally can set the fees for their own transactions to rank higher in the settlement queue and obtain financial gains," it says.

The intrigue: Currently, India holds the presidency of the Group of 20 major economies and hosted a meeting this weekend. But the country has an ambivalent relationship with cryptocurrencies, despite the popularity of coins and tokens with Indian citizens.

Bottom line: "Rapid cryptoization can have an impact on the monetary independence and financial stability of economies," the report warns.

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