A synthesis paper by the International Monetary Fund and the Financial Stability Board appears to have navigated the formidable challenge of outlining a regulatory framework for cryptocurrencies. This achievement is particularly noteworthy given the current global rush among governments to establish control over digital currencies. Finance ministers and central bank governors of the G20 nations have endorsed the proposed roadmap for crypto regulation outlined in this paper. Encouragingly, the crypto industry has also welcomed this proposal.
The broad consensus signals not only the government’s support but also the satisfaction of stakeholders with the suggested approach. This accomplishment in itself is remarkable, considering the inherent difficulty of finding common ground and satisfying all parties involved.
READ | CBDC future: e-Rupee takes the lead in India’s cashless journey
What is new about the IMF-FSB paper
Cryptocurrency regulation has become a concern for governments worldwide due to the surging popularity of this asset class. The absence of regulation has made digital currencies a safety nightmare, causing concern for both policymakers and governments. Some have even called for a complete ban on digital currencies.
In contrast, the roadmap outlined by the IMF-FSB does not advocate for an outright ban on crypto-assets. Instead, it promotes comprehensive regulatory and supervisory oversight as a more effective approach to addressing macroeconomic and financial stability risks. The G20 communique supports the ongoing work and global adoption of FATF (Financial Action Task Force) standards for crypto assets.
The IMF-FSB paper also suggests employing anti-money laundering norms to combat the misuse of crypto assets for criminal and terrorist purposes. It is worth noting that the threat of terrorist financing through digital currencies is real, as demonstrated by cryptocurrency’s role in funding Hamas’ terror activities against Israel. The United Nations estimates that cryptocurrencies account for one-fifth of global terrorist financing. The recent seizure of Hamas accounts has renewed scrutiny of cryptocurrencies.
To address the risks to financial integrity and mitigate the criminal and terrorist misuse of crypto assets, the paper emphasises the need for jurisdictions to implement the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing (AML/CFT) standards. These standards should apply to virtual assets and virtual asset service providers.
One size does not fit all
The IMF-FSB paper acknowledges that it is not the final word in the crypto regulation race. Additional steps will be necessary for some jurisdictions, particularly emerging economies, to address specific risks. Countries will need to develop tailor-made approaches suited to their unique circumstances, especially if they face elevated macro-financial risks associated with crypto assets.
While many countries hoped for a uniform set of regulations, various factors such as the size of the economy and financial system, regulatory priorities, institutional quality, capacity, and the level of financial integration into the global economy must be considered when implementing crypto regulations.
The need for crypto regulation stems from the fact that despite existing for more than a decade, these assets have exhibited significant volatility. Originating in January 2009, shortly after the global financial crisis, the value of crypto-assets has experienced dramatic fluctuations. There have been multiple instances of rapid appreciation followed by steep price reversals. For example, in 2021, the total market value of crypto assets increased by 3.5 times, only to decline from a peak of $2.6 trillion to below $1 trillion during the turmoil that began in May 2022.
Now that the IMF-FSB has presented a roadmap for cryptocurrency regulation, industry players are hopeful that progressive regulations will provide a significant boost to the sector in the country. The Indian crypto industry anticipatesthe establishment, within the next 18 months, of a crypto regulatory authority empowered with the capacity to implement and supervise regulations. The government’s commitment to ensuring the safety of crypto assets is encouraging for retail investors, as a well-defined regulatory framework from both the government and a global overseeing authority promises increased stability and protection.
The industry’s hope is that the government will engage in transparent consultations and seek input from industry stakeholders before finalising policy guidelines. This is especially important in light of past experiences, where ambiguous statements had a detrimental impact on their user base. Additional challenges such as asset taxation, bear markets, and regulatory uncertainties in the past have significantly affected crypto firms.
The crypto industry must prepare to invest in compliance measures to adhere to IMF-FSB regulations once they are implemented in the country. This includes investments in resources, technology, and personnel. The IMF-FSB roadmap calls for global coordination, cooperation, and information sharing regarding crypto assets, as well as the development of a common framework to address data gaps.