By Mark Ackman
A recent paper from the International Monetary Fund (IMF) shed light on some of the issues pertaining to the proof-of-stake (PoS) consensus algorithm for blockchain infrastructure.
The global financial authority also made suggestions about a regulatory framework that could be used for limiting the risks of digital assets globally.
PoS is considered an alternative for the proof-of-work (PoW) consensus algorithm, which is used by Bitcoin, and was also used by the pre-merge Ethereum.
The PoS
As in the case of the PoW network, PoS does not need hardware resources for the purpose of network security.
Instead, ‘validators’ are responsible for validating transactions on the blockchain by staking the native cryptocurrency of the network.
The paper talked about how there may be an excessive concentration of the powers of decision making on wallet service providers and crypto exchanges in a PoS mechanism.
It said that the market integrity risks could rise in this way, even though there would be potential energy savings.
The paper also mentioned that a significant amount of energy is used up by proof-of-work (PoW) mining and this could stand in the way of transitioning the global economy into a low carbon one.
Tech regulation
The IMF’s paper also talked about general tech regulation and said that a neutral approach should be taken by regulators.
However, it added that they should also take into account the regulatory implications associated with different types of technology.
This is due to the fact that some types of consensus algorithms that are used by blockchains could cause friction with the broader objectives of the policy, which means that a neutral approach may not be effective.
A number of other recommendations were made in the report and it also called on the Financial Stability Board (FSB) to take action.
The IMF said that the FSB was well-positioned to take the lead when it comes to developing global standards for supporting the regulation of crypto assets.
The FSB
Immediately after the credit crunch of 2008, the FSB had been founded in 2009 and is established in Basil, Switzerland.
It is responsible for monitoring the global financial system and making recommendations for its improvement.
The FSB is considered as the ‘fourth pillar’ of global economic governance, with the remaining three being the World Bank, the IMF and the World Trade Organization (WTO).
According to the IMF’s report, there may not be any globally systemic financial stability risks associated with crypto assets right now, but the growing implications are already evident in several countries.
The monetary authority used its own research to conclude that the correlation between financial assets and crypto assets was growing, particularly in times of market stress.
The paper also outlined some key steps, which included ensuring that authorization and a license are granted to those entities that conduct core functions.
Moreover, it also said that authorities need to have a complete understanding of the risks that are associated with product understanding and knowledge, market awareness, volatility and the use of crypto assets.