Citing ‘Cryptoization’ as a Sanctions Threat, IMF Calls for Capital Controls

Citing sanction-busting fears that have grown since Russia’s invasion of Ukraine, the International Monetary Fund (IMF) has called for a global crackdown on cryptocurrencies that would bring them into the capital control regimes that govern traditional assets.

In a report released Tuesday (April 19), the global financial stability monitor said that the conflict has sent “shockwaves” that are testing the world “financial system’s resilience.”

In doing so, it “has brought to the forefront some of the challenges that regulators face in terms of applying sanctions,” the IMF said. High among these is “the ongoing trend toward cryptoization in some economies.”

See also: Warren Crypto Bill Would Cast Wide Net in Fight to Enforce Sanctions

The IMF’s April Global Financial Stability Report called out non-compliant exchanges, poor due diligence around anti-money laundering (AML) by many crypto asset providers, and “the use of technologies and platforms that increase the anonymity of transactions, such as mixers, decentralized exchanges, and privacy coins.”

Read more: When Privacy Counts, Crypto Users Turn to Mixing Services

Among the ways to fight this, the IMF said, is by

Coordinating crypto regulation internationally and, where necessary, amending foreign exchange (FX) and capital flow management laws “to cover crypto assets even if they are not classified as financial assets or foreign currency” is one way to fight back, the IMF said.

Another way is with the creation of central bank digital currencies (CBDCs), which may “reduce cryptoization pressures driven by a need for better payment technologies,” according to the report.

FATF Chance

But first and foremost, countries must move faster to implement “the existing Financial Action Task Force (FATF) standards,” such as the Travel Rule that mandates the identification of people sending and receiving crypto.

That is kind of a problem, as the FATF released its own report Tuesday, warning that 46% of its members have not yet complied (9%) or have only partially complied (37%) with the requirement to implement the Travel Rule.

Not Happening Yet

Notably, the IMF report agreed with a parade of witnesses at the March 17 Senate Banking Committee hearing on the role digital assets play in supporting illicit finance that cryptocurrency was not being used to beat sanctions in a significant way.

While crypto trading volumes spiked when sanctions were imposed, “liquidity in the ruble … in centralized exchanges remains limited and has even declined more recently in the case of ruble,” the report said. As a result, it added, “making large-scale transfers of value through crypto asset exchanges [is] impractical.”

Michael Mosier, formerly acting director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) told senators that sanctioned regimes “can’t flip a switch overnight and run a G20 economy on cryptocurrency without anyone noticing.”

While the IMF said decentralized finance (DeFi) has the potential to improve efficiency, and is becoming “increasingly interconnected with traditional financial intermediaries,” it has the potential to become a big problem if its market share continues to grow rapidly.

“Unregulated DeFi poses market, liquidity and cyber risks, against a backdrop of legal uncertainties,” the IMF wrote.