Update (Sept. 7, 2023, 11AM UTC): This article has been updated to add more information on the policy paper.

The International Monetary Fund (IMF) and the Financial Stability Board (FSB) have published a joint paper containing policy recommendations at the request of the Indian G20 presidency. The organizations have created the paper to combine the standards and consolidate collective recommendations to provide guidance and help various jurisdictions address risks associated with crypto asset activities.

The policy paper includes recommendations for regulating activities related to stablecoins and decentralized finance (DeFi). It also describes how regulatory frameworks and policies developed by both the IMF and the FSB can interact and fit together. However, it does not set or establish new policies, recommendations or expectations for relevant authorities.

According to the paper, stablecoins which are created with the intention of holding a stable value can abruptly become volatile and hold a huge risk to financial stability. Meanwhile, when it comes to DeFi protocols, the paper argued that while the processes used to provide DeFi services may be different from traditional financial platforms, DeFi “does not differ substantially from the traditional financial system in the functions it performs.”

Related: Binance CEO CZ forecasts DeFi outgrowing CeFi in the next bull run

The paper also noted that as DeFi attempts to replicate some functions of the traditional financial system, it also may amplify and inherit the risk and vulnerabilities in traditional systems. This may include liquidity and maturity mismatches, operational fragilities, interconnectedness and leverage. According to the paper: 

“Claims of decentralisation often do not hold up to scrutiny. Presently, DeFi may exhibit unclear, opaque, untested or easy-to-manipulate governance frameworks that may expose users to risks.”

The report also reaffirmed the IMF’s stance about a blanket ban on crypto. On June 22, the IMF pointed out that banning crypto may not be effective in the long run. The IMF said that instead of banning crypto, various authorities should focus on addressing what drives the demand for crypto, including the consumers’ needs for digital forms of payment.

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