By Nafis Alam, Monash University, Malaysia in Kuala Lumpur
A paper proposing globally enforceable regulations for the crypto market is expected to be presented at the world’s premier economic meeting.
The cascade of crypto events in 2022, highlighted by the bankruptcy of crypto exchange firm FTX and its effect on trading and lending firms, underscored the inherent instability and weaknesses in crypto assets.
These incidents also showed a significant service provider collapsing can swiftly spread risks across the crypto-asset framework, making the ecosystem vulnerable.
This in turn affects the wider economy as investments lost in the crypto market are still tied to money circulating in the financial system.
Under the leadership of India’s presidency, the G20 countries are poised to introduce what could be recognised as the first-of-their-kind regulations governing cryptocurrencies and crypto assets worldwide.
The regulations are being drawn up with the support of the International Monetary Fund (IMF) and the Financial Stability Board (FSB), a body that monitors and makes recommendations on the global financial system.
Regulations are expected to help investors harness the potential benefits of crypto-assets while mitigating associated risks by addressing security, consumer protection, financial stability and international cooperation issues.
Among these is ‘cryptoisation’: when cryptocurrencies and assets are substituted for a country’s domestic currency and assets, circumventing exchange and capital control restrictions.
The newly-drafted framework for the regulations is guided by the ‘same activity, same risk, same regulation’ principle. It is designed to guarantee proper protection of client assets, manage risks linked to conflicts of interest and enhance collaboration across international borders.
Regulators want more robust regulations to make the crypto economy less vulnerable. The FSB’s framework is a path towards this aspiration. The framework will provide input for a ‘synthesis paper’, with the IMF to support a coordinated and comprehensive policy approach to crypto-assets.
The synthesis paper’s main focus is expected to be on cryptocurrency’s worldwide macro implications, that is how it may affect state and national economies with broader international consequences.
It will do this by combining the policy findings from IMF work on macroeconomic and monetary issues and FSB work on supervisory and regulatory issues.
The coordinated effort will lead to rules that countries can follow to ensure digital currencies are used safely and don’t cause big problems for the economy.
The paper, to be tabled at the G20 Summit in New Delhi in September, is expected to highlight concerns that include regulatory compliance and ensuring the companies handling digital currencies are doing it securely and responsibly.
The policy paper’s recommendations could chart the way for mitigating risks associated with crypto-assets.
Among the provisions expected in the paper are some aiming to ensure the security of crypto-asset custody and address consumer protection and market integrity issues.
It could also suggest that countries work together to prevent money laundering and other illegal activities involving digital currencies.
The policy paper will help the wider community understand crypto-assets better and highlight their benefits while recognising the risks and challenges their volatile, decentralised nature poses.
The paper is expected to encompass suggestions from India’s presidency document as well as insights from regulatory bodies beyond the FSB and IMF.
India will use the G20 summit to try to showcase its efforts advocating for a universally acceptable framework for cryptocurrency regulations.
An assembled comprehensive paper would serve as a testament to these efforts. There is even a possibility that Indian Prime Minister Narendra Modi might proudly highlight the establishment of these proposed global cryptocurrency regulations under India’s leadership during his opening speech at the G20 leaders’ summit.
India has already positioned itself as a global leader in crypto regulations.
It has established anti-money laundering obligations for crypto operators, where they have to register with India’s Financial Intelligence Unit and voluntarily report any suspicious activities.
India also wants to give users the ability to digitally sign documents using a crypto token, bolstering secure transactions and digital interactions and supporting Web3, another big boost for crypto usage.
In its 2022 budget, the Indian government classified cryptocurrencies as Virtual Digital Assets (VDAs) and introduced a taxation framework for them, which defined cryptocurrency selling, swapping or spending regardless of any amount or term limits.
India will use its G20 presidency and work with the FSB and IMF on the synthesis paper to validate some of its national regulations. It hopes those policies can be converted to global regulations for crypto assets, promoting India as a leader in crypto regulations.
If it can achieve its regulatory aims, India might find itself as a pioneer in bringing order to the evolving world of crypto-assets.
Nafis Alam is a finance professor and the Head of the School of Business at Monash University Malaysia. His research mainly focuses on financial regulation, FinTech and RegTech. He tweets at @nafisalam. He declares no conflict of interest.
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