The Road To Policy Consensus on Cryptocurrency Assets India’s G20 Presidency
India’s G20 Presidency is grounded in the theme “Vasudhaiva Kutumbakam”, or “One Earth, One Family, One Future”, which underlines the message of equitable growth and a shared future for all. Digital technology is playing an important role in achieving this goal, by transforming the financial sector, boosting financial inclusion, and improving financial market efficiency. The Indian Presidency’s priority on the financial sector regulatory reforms in 2023 is to make the digital financial system more efficient, secure, and stable.
Despite the rapid evolution of the crypto universe, there is no comprehensive global policy framework for crypto assets. Given the concerns over greater interconnectedness between crypto assets and the traditional financial sector as well as the complexity and volatility around crypto assets, policymakers are calling for tighter regulation. The global standard-setting bodies, such as the Financial Action Task Force (FATF), Financial Stability Board (FSB), Committee on Payments and Market Infrastructures (CPMI), International Organization of Securities Commissions (IOSCO) and Basel Committee on Banking Supervision (BCBS) have been coordinating the regulatory agenda, while working within their respective institutional mandates.
Shaping Global Policy Dialogue on Crypto Assets
India hopes to broaden the G20 discussion on crypto assets beyond financial integrity concerns and capture the macroeconomic implications and widespread crypto adoption in the economy. This will require a data-based and informed approach to the global challenges and opportunities of crypto assets, allowing G20 members to shape a coordinated and comprehensive policy response.
To inform policymakers on the broader macroeconomic and financial stability implications of crypto assets, the Indian Presidency requested the International Monetary Fund (IMF) to prepare a discussion paper on the topic for the 2nd G20 Finance and Central Bank Deputies Meeting held in Bengaluru on 23rd February 2023. During the said meeting, a seminar titled “Policy Perspectives: Debating the Road to Policy Consensus on Crypto Assets” was held, as part of the Presidency’s efforts to broaden the dialogue around crypto assets. The IMF speaker, Mr. Tommaso Mancini-Griffoli, presented the discussion paper during the event, highlighting the consequences of crypto adoption on the internal and external stability of a country’s economy as well as on the structure of its financial system. Mr. Mancini-Griffoli underlined that the purported benefits of crypto assets include cheaper and faster cross border payments, more integrated financial markets, and increased financial inclusion, but these are yet to be realised. He further added that problems with interoperability, safety and efficiency cannot be guaranteed by the private sector and critical digital infrastructure/platforms for ledgers should be viewed as a public good. He also flagged the global information gaps pertaining to the crypto asset universe and the need to build a deeper understanding of the interlinkages, opportunities and risks pertaining to crypto assets under the aegis of the G20.
The seminar was attended by Deputies from G20 member countries, international organisations as well as eminent experts on the subject. The discussions covered a wide range of topics, including:
- the need for a common taxonomy and a systematic classification of the crypto asset universe,
- benefits and risks of crypto assets
- macroeconomic policy questions that needed to be evaluated further, and,
- financial stability issues and regulatory responses.
Panellists included scholars from academia, like Mr. Eswar Prasad from Cornell University and Ms. Hilary Allen from American University, who argued about the highly centralised nature of the crypto universe despite claiming to be a decentralised platform. Mr. Hyun Shin, from the BIS, debated on the costs and benefits that crypto assets create for the real economy and on the need to establish clear regulatory perimeters for new Fintech innovations. Several concerns were raised by speakers and participants from G20 countries around the lack of governance structures in the crypto universe and the need to also look at alternate solutions to address existing challenges in global financial and payment systems.
The event has helped initiate a broader dialogue on crypto assets, but also raises several pertinent policy questions that policymakers and regulators need to evaluate closely. In addition to evaluating the consequences of crypto assets to the broader economy, there is also an existential question on whether crypto assets are indeed the optimal solution for existing challenges in global financial systems.
Way Forward
To complement the ongoing dialogue on the need for a policy framework, the Indian Presidency has proposed a joint technical paper by the IMF and the FSB which would synthesise the macroeconomic and regulatory perspectives of crypto-assets. This would help in the formulation of a coordinated and comprehensive policy approach to crypto assets. The international organisations are expected to present their joint paper during the 4th Finance Ministers and Central Bank Governors meeting in October 2023. The paper is expected to be supplemented by similar such discussion seminars on the side lines of other G20 meetings held under the Indian Presidency. The discussions are further expected to build informed debate within the G20 meetings and lead to formulation of a coordinated and comprehensive policy approach.
In their entirety, the IMF’s discussion paper, the policy seminar and the joint IMF-FSB paper are expected to integrate the policy questions pertaining to macro-financial and regulatory perspectives of crypto assets and facilitate a global consensus on a well-coordinated and comprehensive policy approach to crypto assets.
What is Cryptocurrency:
Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don’t have a central issuing or regulating authority, instead use a decentralized system to record transactions and issue new units. It is supported by a decentralized peer-to-peer network called the block chain.
Status of Crypto regulation in India:
The Finance Minister answered a question recently in Parliament about the Indian government’s stance on cryptocurrencies. Some even suggested that there was a fresh plan to ban crypto in India.
The Finance Minister’s answer reveals that while India’s central bank wants a ban on cryptocurrencies, any legislation for the “regulation or for banning crypto” can be effective only after significant international collaboration.
This June, amid all the attention over inflation and the related capital market turmoil, the European Parliament and Council, the legislative arms of the European Union, came to a provisional agreement on long-awaited regulations on crypto, namely, the Regulation of Markets in Crypto-Assets, or MiCA.
Benefits Associated with Cryptocurrency:
Fast and Cheap Transactions: Cryptocurrencies are way cheaper to use to execute international transactions because the transactions don’t have to be handled by a series of intermediaries before they reach their destinations.
Investment Destination:
There is a limited supply of cryptocurrency – partially like gold.
Moreover, the last few years have seen the price of cryptocurrencies rising faster than other financial instruments.
Due to this, cryptocurrencies can become a preferred investment destination.
Anti-Inflationary Currency: Due to the high demand for cryptocurrency its prices have largely remained on a growing trajectory. In this scenario, people tend to hold more cryptocurrency than spending it. This will cause a deflationary effect on the currency.
Drawbacks associated with Cryptocurrency:
Extremely Volatile: Cryptocurrencies are highly volatile assets and have acquired popularity for their unregulated nature and the risk of volatility has established concerns over the potential impact on a country’s macroeconomic stability, especially those with weak socio-economic fundamentals.
Unregulated Nature: International Monetary Fund (IMF) had also urged El Salvador to limit the scope of unregulated assets as there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.
Paying Taxes in Cryptocurrencies: For countries like CRA, risks associated with paying taxes in cryptocurrencies would be exposed when taxes are paid using crypto assets but expenditures remain in local currency.
Not a Definite Mechanism: Unlike equities or currencies, cryptos are not subject to a definite mechanism and are speculative assets, therefore, central banks would not have any reference point to devise their interest rates in accordance with their domestic requirements.
Counterproductive Utility: Block chains may help trace the transactions but not the parties involved. Hence, it could potentially be used for money laundering, terrorist financing, or other illegal activities.
- How do governments view cryptocurrencies?
Discourage the widespread use of cryptocurrencies: Many Countries have taken several steps to discourage the widespread use of cryptocurrencies. China and Russia banned and India taxed: While countries such as China and Russia have opted to impose outright bans on cryptocurrencies, India has tried to tax and regulate them heavily.
RBI in favour of ban: In India, while the government has not imposed an outright ban on cryptocurrencies, the Reserve Bank of India Has been quite vocal about the need to ban them completely. Challenges the monopoly of central banks: Central banks are wary of private cryptocurrencies since they challenge the monopoly that central banks currently enjoy over the money supply of an economy.
Control over economy: If Cryptocurrencies became widely acceptable, it would affect the control that central banks possess over the economy’s money supply. Affecting the ability of the government to fund spending: It would also affect the ability of governments to fund their spending by creating fresh money as citizens could then opt to switch to alternative currencies.
- Why is crypto regarded as a seamless asset?
Crypto is an Internet-native asset not limited by geographical boundaries. To transfer crypto, one does not need a pipeline or shipping container. A steady Internet connection and some elemental knowledge of crypto services are what are needed that will allow anyone in the world to transfer crypto assets Crypto assets are not issued or controlled by any enterprise. There are a little over 19 million bitcoins in circulation at present, out of the total capped supply (hence, the scarcity) of 21 million bitcoins Any of the estimated 75 million crypto wallet holders could be owning these bitcoins, or their fractions (called satoshis or sats).
The Regulation of Markets in Crypto-Assets(MiCA) by European Parliament:
It proposes to regulate crypto asset services and crypto asset issuers.
Consumer protection, transparency, and governance standards: By regulating these entities, Europe intends to provide consumer protection, transparency, and governance standards, regardless of the decentralized nature of the technology.
Liability of Crypto asset service providers: Crypto asset service providers will be liable in case they lose investors’ assets, and will be subject to European market-abuse regulations, including those on market manipulation and insider trading.
Specific regulations for stablecoins: Under the proposed rules, issuers of stablecoins — asset-referenced tokens is the term it uses — are subject to a greater degree of compliance and declaration.
Reserves to cover all claims of the coin: Under MiCA, stablecoin issuers must maintain reserves to cover all claims of the coins, and should implement a process for immediate redemption if and when holders seek one.
Source : PIB
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