The IMF Must Develop Best Practices Before Government-Backed Cryptocurrencies Destabilize the International Monetary System
Jacob Goldsmith
Imagine the following hypothetical—Russia, under economic sanctions from the West (i.e., the Western Bloc, including the United States, the United Kingdom, Australia, Canada, etc.) which bar consumers from conducting business with Russian corporations, introduces a government-backed cryptocurrency ("the e-Ruble"), accessible to all members of the European continent, both European Union (EU) members and non-members.1 Russian corporations, hoping to re-enter the European markets, propose their customers use this Russian-backed cryptocurrency to circumvent the sanctions.
European citizens, seeing the benefits of the e-Ruble—particularly its cross-border reach and lower transaction fees—begin using this Russian-backed cryptocurrency, increasing demand for the e-Ruble and weakening the Euro.2 Furthermore, China, in an economic alliance with Russia, permits Chinese corporations to conduct business using the e-Ruble.3 European consumers and businesses, now allowed to use the e-Ruble in two of the largest export markets and six of the largest eleven world economies, further weaken by lowering its demand.4
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Seeking revenge on the EU, and the West more broadly, for previously imposed economic sanctions, Russia initiates a speculative attack on the Euro.5 In an attempt to ensure EU citizens have a stable, sovereign currency not under Russia's control, the EU rushes to adopt its own "e-Euro," which has similar characteristics to the e-Ruble. Reminded of the Cold War, the EU also urges the United States to adopt its own government-backed cryptocurrency, sensing that this could be the next front of attack for Russia. These actions spur reactionary measures by both developed and developing countries,6 and soon after, the world is fighting through currency manipulation. The front for the war is government-backed cryptocurrencies and there is no established framework for oversight, nor is there an international organization capable of containing the "fighting" or its national and international consequences. The near constant currency manipulation, amid global adoption of government-backed cryptocurrency, results in the collapse of the international monetary system, setting the globe back nearly eighty years.
While this scenario may seem far-fetched, the characteristics of cryptocurrency make it a distinct possibility.7 Cryptocurrencies, and the technology underlying them, are promising technological advancements.8 However, some of the characteristics that make the technology so promising are also the characteristics which could lead to a minor problem spiraling out of control. Government-backed cryptocurrency poses a threat to the stability of the international monetary system and, barring rapid and proactive measures, the international community risks sustaining significant injury to the infrastructure of the international economy.
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Cryptocurrency9 is the flavor of the month (or decade), and the darling of Silicon Valley, Wall Street, and Main Street.10 But it is not all sunshine and rainbows; the volatility of Bitcoin, and other cryptos, has been covered ad-nauseum.11 While "cryptocurrency" often evokes worries of "price volatility," this is not the biggest threat posed by cryptocurrency.12 Cryptocurrencies, specifically government-backed cryptocurrencies,13 present a threat to the stability of the international monetary and financial systems.14
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Governments have been slow,15 ineffective,16 and inconsistent in implementing regulatory responses to private cryptocurrencies.17 As of May 2019, governments have managed to avoid such dangers, primarily because private cryptocurrencies18 are not yet of significant enough heft to destabilize the entire international monetary system.19 However, the European Central Bank (ECB) posits that, "[t]he build-up of financial stability risks from [Virtual Currency Schemes (VCS)] would be likely under the following conditions: (i) VCS become more widely used in regular payments; (ii) greater links to the real economy develop, including through the presence of financial institutions participating in VCS ... "20
The biggest concern for government-backed cryptocurrencies is the potential instability within the international economy and monetary system.21 Moving forward, more countries will dip their toes into the waters, choosing either to adopt their own, or another country's government-backed cryptocurrency.22 And while the international community has so far managed to avoid catastrophe, government-backed cryptocurrencies pose a greater threat to the stability of the international monetary system than do private cryptocurrencies.23 Government-backed cryptocurrencies have the potential to become fully integrated within the
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international monetary system.24 This integration, combined with the lack of oversight or system of best practices, governments and international organizations ought to be acting with more urgency.25 Governments should prioritize development of mechanisms to counter potential instability posed by widespread adoption of government-backed cryptocurrency. Stability risks to international systems are one of the most pressing issues facing governments and governance organizations around the world.26
How should the global community address this concern of potential instability posed by government-backed cryptocurrency? Is there one specific organization which ought to "take the wheel" in coordinating a best practices regime for government-backed cryptocurrency? Or is the current system, one in which each country sets their own oversight framework, the best way to deal with the potential instability posed by government-backed cryptocurrency to the international monetary system?
Development of a cohesive and consistent international standard for best practices will allow government-backed cryptocurrency to flourish, while limiting the potential dangers posed to the international monetary system. The organization best-equipped to handle international oversight of government-backed cryptocurrencies is the International Monetary Fund (IMF).27 The IMF can provide protection to consumers, investors, and states by providing legitimacy to these government-backed cryptocurrencies and by helping the international community deal with the risks associated.28
This Comment justifies, in the context of private cryptocurrency regulatory schemes, IMF leadership in developing an international framework of "best practices" and proposes the IMF "pick up the pace" in creating such an oversight framework.
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Given that development of government-backed cryptocurrency is seemingly in the initial stages, there are few real-life examples from which to draw upon.29 This Comment will look to the international regulatory treatment of private cryptocurrencies, primarily using Bitcoin as an example, and evaluate the approach that might best translate to oversight of government-backed cryptocurrencies. However, this Comment will not assess the effectiveness of current regulatory schemes in regulating private cryptocurrencies, nor proffer a suggestion for which regulatory scheme best fits private cryptocurrencies. In addition, this Comment will not address the potential implications of government-backed cryptocurrencies for the future of private cryptocurrencies.
This Comment will begin in Part I by looking at the recent, widespread interest in government-backed cryptocurrencies. Part I will also discuss the threat posed to the stability of the international monetary system and the existence of a framework (or lack-thereof) for oversight of government-backed cryptocurrencies.
In Part II, this Comment will discuss private cryptocurrencies, focusing specifically on Bitcoin, its characteristics, and the various regulatory schemes currently in place around the world. Private cryptocurrencies do not fit neatly into any one classification of regulated good.30 Examining the various approaches to regulation of private cryptocurrency will help to determine whether a parallel oversight framework can be applied to government-backed cryptocurrencies.
In Part III, this Comment will identify the differences between private cryptocurrencies and government cryptocurrencies, in an effort to identify which limitation, or limitations, ought to be of primary concern.
In Part IV, this Comment will look to the global response to private cryptos to provide some insight on how an oversight framework for government-backed cryptocurrency might be devised. This Comment will then parse through the globe's stumbling attempts to regulate private cryptocurrencies,31 in hopes of finding a solution to deal with the potential instability posed by the proliferation of government-backed cryptocurrencies.
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Finally, this Comment will propose that the IMF take on efforts of coordinating an international standard for best practices with greater urgency. By proposing that such coordination and oversight fall under the purview of the IMF, the international community can preemptively address one of the major dangers arising from widespread adoption of government-backed cryptocurrencies.
The dam is about to break in terms of widespread adoption of government-backed cryptocurrencies.32 In August 2018, Venezuela launched the Petro, garnering media attention across the globe.33 It seemed to be a clear attempt to capitalize on the "crypto-craze," spurred by Bitcoin's meteoric rise since early 2017.34 However, many investment analysts have been quick to criticize the Petro as a clear scam.35 On the other hand, Sweden, Japan, and Estonia have all contemplated the idea of releasing their own, more...
