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How can governments and central banks keep cryptocurrencies safe?

If the so-called crypto-assets are to be regulated, then there needs to be a collaboration among governments and central banks across the globe, an official from the International Monetary Fund said.

In a blog post, MF managing director Christine Lagarde said the efforts to fight the criminal use of these unregulated assets begin with close international co-operation.

Lagarde recognized that the technology behind cryptocurrencies provides an exciting opportunity for financial players to revolutionize the financial system, and provide innovative and low-cost payment methods to those who do not have bank accounts. She even said the rich potential of such technology has resulted in some central banks thinking of setting up their own digital currencies.

“The same reason crypto-assets are so appealing is also what makes them dangerous,” she said, adding that this could potentially be a new avenue for crimes such as money laundering and financing terrorism.

She cited the incident involving AlphaBay as a perfect testament to how these assets can be taken advantage of by criminals. AlphaBay was shut down last year for selling US$1bn worth of illicit drugs, hacking tools, firearms and toxic chemicals through crypto-assets.

The rise of these crypto-assets also puts financial stability in question. Lagarde said the extreme volatility in cryptocurrencies’ traded prices and their ill-defined connections to the traditional financial world could easily create new vulnerabilities, which the global markets are not yet ready for.

Following the efforts of the Financial Stability Board (FSB) and the Financial Action Task Force (FATF), Lagarde is encouraging governments and central banks to implement policies to ensure financial integrity and consumer protection. She also enumerated two ways on how the technology serving as the backbone of cryptocurrencies can be used to curb criminal activities surrounding the said assets.

For instance, she noted how the distributed ledger technology (DLT) can be used to speed up information-sharing between market participants and regulators.

“Those who have a shared interest in maintaining safe online transactions need to be able to communicate seamlessly,” Lagarde said.

She added: “Better use of data by governments can also help free up resources for priority needs and reduce tax evasion, including evasion related to cross-border transactions.”

Meanwhile, biometrics, artificial intelligence and cryptography are seen to enhance digital security and identify malicious transactions in close to real time. This would enable law enforcement to immediately act upon and stop illegal transactions.

Lagarde said these practical ways allow the community to get rid of the “pollution” from the crypto-assets ecosystem.

“By working together, and leveraging technology for the public good, we can harness the potential of crypto-assets while ensuring that they never become a haven for illegal activity or a source of financial vulnerability,” she said.