Concrete plan needed for crypto: G20 paper

ByRajeev Jayaswal, New Delhi
Sep 08, 2023 04:51 AM IST

The crypto ecosystem needs comprehensive regulatory and licensing mechanisms for macroeconomic and financial stability, a synthesis paper said.

The crypto ecosystem needs comprehensive regulatory and licensing mechanisms for macroeconomic and financial stability, a synthesis paper prepared for the G20 has said, cautioning governments that widespread adoption of cryptocurrencies and assets based on them could undermine the effectiveness of monetary policy, circumvent capital flow management measures, exacerbate fiscal risks, divert resources available for financing the real economy, and threaten global financial stability.

A worker cleans in front of a G20 logo inside the international media centre at the G20 venue days ahead of its commencement in New Delhi on September 7.(AFP)
A worker cleans in front of a G20 logo inside the international media centre at the G20 venue days ahead of its commencement in New Delhi on September 7.(AFP)

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The paper, prepared by the International Monetary Fund (IMF) and the Financial Stability Board (FSB), said a comprehensive response is necessary.

“To address macroeconomic risks, jurisdictions should safeguard monetary sovereignty and strengthen monetary policy frameworks, guard against excessive capital flow volatility and adopt unambiguous tax treatment of crypto-assets,” it said.

The paper synthesises IMF’s views on macroeconomic risks and FSB’s regulatory aspects, is in lines with India’s position that cryptocurrencies could pose huge risks to the stability of the financial system, hence global cooperation on this matter was warranted, an official said, asking not to be named.

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The G20 India Presidency placed it as one of the key economic challenges and the synthesis paper has come out with a comprehensive road map, subject to the approval of leaders, the person said, adding that the recommendations of the paper are only guiding principles and not binding on countries.

Cryptocurrencies, such as Bitcoin and Ether, and products developed around them --- including for loans --- fall outside of the purview of formal financial systems since their value is often determined by demand, without any underlying asset.

“Regulation and supervision of licensed or registered crypto-asset issuers and service providers can support the functioning of capital flow measures, fiscal and tax policies, and financial integrity requirements,” the paper said.

Regulations and appropriate reporting requirements can reduce data gaps that are particularly important for capital flow measures that rely on monitoring of cross-border transactions and capital flows, it said.

Recommendations, generic in nature, included utilisation of appropriate powers, tools and resources to regulate crypto-asset activities, markets, crypto-asset issuers and service providers. It also suggested cross-border cooperation, coordination, and information sharing -- both domestically and

Internationally -- to encourage consistency of regulatory and supervisory outcomes.

“These recommendations and standards apply the principle of ‘same activity, same risk, same regulation’, establish a minimum baseline that jurisdictions should meet, and aim to address the set of issues common across the majority of jurisdictions,” it said.

It recommended establishing strong governance and effective risk management systems. “Authorities should have access to the data as necessary and appropriate to fulfil their regulatory, supervisory and oversight mandates,” it added.

The paper emphasised on transparent disclosures by crypto-asset issuers and service providers about their governance framework, operations, risk profiles and financial conditions, as well as the products they provide and activities they conduct.

“To address risks to financial integrity and mitigate criminal and terrorist misuse of the crypto-assets sector, jurisdictions should implement the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing (AML/CFT) standards that apply to virtual assets (VAs) and virtual asset service providers (VASPs),” it said.

While a Bitcoin would qualify for the crypto-asset definition, an exchange such as Binance qualifies as a service provider.

The recommendations are joint efforts of the FSB and standard-setting bodies (SSBs), the paper said adding that they address financial stability, financial integrity, market integrity, investor protection, prudential and other risks derived from crypto-assets. The recommendations also factored highly volatile nature of crypto-assets. In 2021, the total market value of crypto-assets grew 3.5-fold, and in the crypto-asset market turmoil that started in May 2022, the total market value shrank from a peak of $2.6 trillion to below $1 trillion, the paper said.

The paper gave a basic framework to handle issue to the global community. “Some jurisdictions, in particular emerging markets and developing economies (EMDEs), may want to take additional targeted measures that go beyond the global regulatory baseline to address specific risks. These jurisdictions may want to adapt these targeted measures to their country-specific circumstances, especially if they face elevated macrofinancial risks from crypto-assets,” it said.

Ashish Singhal, co-founder and CEO of CoinSwitch said: “The paper is a testimony to India’s leadership in driving a global consensus on crypto regulations and provides a clear policy roadmap for all countries to adopt.”

“Licensing structure for crypto asset service providers is something Japan, South Korea and some others have proactively implemented; India could now consider a similar regime,” Singhal said.

Edul Patel, CEO and co-founder of Mudrex said: “The recommendation focuses on cash flows, taxation policies, and financial integrity. It signifies a progressive step towards providing greater clarity, potentially necessitating licensing for service providers and reporting mechanisms for fraudulent transactions. This approach aims to reduce data gaps and to align cryptocurrencies with the regulation of conventional assets.”

“India’s proactive role in this initiative positions it as a leading advocate for responsible and forward-thinking cryptocurrency regulation on the global stage. This not only instills confidence in Indian investors but also globally,” Patel said.

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