Cryptocurrencies are more likely used to move ill-gotten gains abroad in countries perceived as corrupt, the International Monetary Fund (IMF) said.
Doubling down on its case for stronger international regulation of cryptocurrencies, the IMF said digital assets may be used to transfer corruption proceeds or circumvent capital controls.
In a study that surveyed thousands of people, the Washington-based fund pointed out that countries with more corruption tend to have more people using cryptocurrencies. When those countries also have strong capital controls that make it harder to transfer money abroad quietly, there are even more crypto users. “Since poorer nations tend to have more stringent capital controls processes that prohibit foreign funds from moving into and out of the country’s economy, cryptocurrency may be a useful tool for avoiding taxes and other government regulations,” said the report.
The IMF report comes as nations around the world are considering the best way to regulate the $2 trillion crypto market, with the level of oversight varying greatly from one country to another.
The issue has come to the fore with some regulators fearing that Russian oligarchs that support President Vladimir Putin’s invasion of Ukraine may turn to crypto and anonymising tools to evade sanctions and protect their assets around the globe.
“The pseudonymity of crypto-assets (whereby transactions require only digital identities) makes them a potential vehicle for illicit flows, including flows of proceeds from corruption.”
The IMF argues why countries might want to require intermediaries, such as digital currency exchanges, to implement know-your-customer procedures -- ID verification standards that are designed to prevent fraud, money laundering and terrorism financing, the organization said. Some countries, like the US, have already instituted those kinds of controls.
Rejecting the Ukrainian government’s requests that exchanges ban all Russian clients, not just those under sanction, Coinbase CEO Brian Armstrong tweeted that “ordinary Russians are using crypto as a lifeline now that their currency has collapsed. Many of them likely oppose what their country is doing, and a ban would hurt them, too.”
The IMF is concerned particularly because the nascent market is growing at such a significant pace and regulation is not following suit. The total market value of all crypto assets surpassed $2 trillion in September 2021 — representing a 10-fold jump from levels seen at the start of 2020, data collected by the IMF shows.
One of the problems that the IMF has highlighted is that many of the people and financial institutions trading these assets “lack strong operational, governance, and risk practices.”
The fund argues that as such consumers are at risk, and there is simply “inadequate disclosure and oversight” in this space. Furthermore, it believes crypto assets create some “data gaps” and “can open unwanted doors for money laundering, as well as terrorist financing.”
For the study entitled, “Crypto, corruption, and capital controls: Cross-country correlations,” the IMF questioned approximately 2,000 to 12,000 individuals in each country regarding their cryptocurrency usage, totaling over 110,000 persons in over 55 nations.
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