IMF Says Proof-of-Stake Approach Could Give Crypto Exchanges, Wallet Providers Too Much Decision-Making Power

The IMF paper said regulators should opt for a "technology-neutral approach".

Written by Shomik Sen Bhattacharjee, Edited by David Delima | Updated: 28 September 2022 17:03 IST

IMF Says Proof-of-Stake Approach Could Give Crypto Exchanges, Wallet Providers Too Much Decision-Making Power

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The IMF has continually emphasised the importance of international collaboration

Highlights

PoS “validators” stake native cryptocurrency to validate transactions
PoS is an alternative to the proof-of-work consensus mechanism
IMF has called on the FSB to set crypto regulation standards

The International Monetary Fund (IMF) in a recently published paper highlighting certain issues that revolve around the Proof-of-Stake (PoS) approach to blockchain infrastructure, also proposing a regulatory framework that would limit the global risks of digital assets. Proof-of-stake is a type of consensus mechanism used to validate cryptocurrency transactions. With this system, owners of the cryptocurrency can stake their coins, which gives them the right to check new blocks of transactions and add them to the blockchain.

IMF's newly published paper touches on how PoS "could create an excessive concentration of decision-making powers on crypto exchanges and wallet services providers, which may increase market integrity risks" despite the energy savings. It also highlighted how Proof-of-Work mining requires significant energy, which could counteract the "global aim of transitioning to a low-carbon economy."

The PoS model allows owners of a cryptocurrency to stake coins and create their own validator nodes. Staking is when you pledge your coins to be used for verifying transactions. Your coins are locked up while you stake them, but you can unstake them if you want to trade them.

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When a block of transactions is ready to be processed, the cryptocurrency's proof-of-stake protocol will choose a validator node to review the block. The validator checks if the transactions in the block are accurate.

Regarding tech regulation in general, the paper said regulators should take a "technology-neutral approach" but should also "consider the regulatory implications of different forms of technology" as "certain types of consensus mechanisms that underpin blockchains may inherently generate frictions with broader policy objectives and mandates" saying a "technology-neutral approach may not be sustainable going forward."

The IMF paper was published alongside another report on regulating stablecoins calls on the Financial Stability Board (FSB) to set and lead global efforts on crypto regulation. The reports, published on Monday, state that the watchdog is "well placed to take the lead in coordinating and establishing global standards to support national regulation of crypto assets,” as well as guiding the national implementation of the regulation of crypto assets while considering sector-specific standards.

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