as some countries explore the use of cryptoassets to evade foreign exchange and capital controls, and institutional investors increase their holdings of stablecoins in a low interest rate environment, the links between cryptoassets and the core financial system are growing stronger, potentially raising concerns about systemic risks and financial stability. Therefore, stronger financial regulation and supervision, and developing global standards, are essential to address these risks.

Based on the relative stability of the cryptoassets ecosystem, this article proposes five key recommendations:1) Cryptoasset service providers should be licensed, registered, and authorized, and client assets should be segregated from company assets and insulated from other functions.2) Entities performing multiple functions should comply with additional prudential requirements, and strict disclosure requirements should be followed.3) Issuers of stablecoins should be subject to strict prudential requirements, and depending on the model and scale of stablecoins, may require regulatory oversight similar to that of banks.4) Financial institutions interacting with and participating in cryptocurrencies should have clear regulatory requirements.5) Coordinated efforts should be made to establish global management and supervision of cryptoassets, and enhance cross-border and cross-sector collaboration.

Authors: Bo Li, Deputy Managing Director of the International Monetary Fund, and Nobuyasu Sugimoto, Deputy Director of the Financial Regulation Department of the International Monetary Fund.Publication Date: January 18, 2023Title: Crypto Contagion Underscores Why Global Regulators Must Act Fast to Stem Risk