By: Udaibir Das
This article originally appeared in the OMFIF on March 14, 2023 under the title ‘India emerging as leader in global crypto framework efforts.'
‘When moon? When Lambo?’ A unified approach is just around the corner
The global community is searching for a unified policy approach towards cryptoassets. India, as G20 president, is emerging as a leader in such a framework.
The G20 finance ministers and central bank governors have tasked the International Monetary Fund and the Financial Stability Board to develop a joint ‘synthesis’ paper on the cryptoasset ecosystem within seven months. India has rightly insisted that any global policy approach must go beyond regulation and supervision and cover the macroeconomic aspects of cryptoassets. A new international financial standard is thus attainable by the end of India’s G20 presidency.
India’s concern around the global regulation of the cryptoverse, which includes all economically relevant crypto-related offerings, is sensible and its urgency in this matter is justified. In just a few years, the cryptoverse has grown from a few digital assets to numerous cryptocurrencies and assets, and more technology-based experiments are underway.
The international discourse around the growth of the cryptoverse is divided. Proponents argue that crypto can be a tool to promote social equity and sustainability. Others dismiss this notion as a bold claim until more is understood and regulations are established. In its supervisory guidance letter on cryptoasset activities issued in late 2022, the Federal Reserve said to the banks, ‘Don’t jump in and plan to figure out risk management later.’
Nevertheless, this division has yet to deter the growth of the cryptoverse. Some estimates put the total market capitalisation at around $3tn – a small part of the global financial system but proliferating. The evolving cryptoverse shows sizeable operational disparity across markets. Over 6,000 tokens are moving around, and new crypto products are launched daily. The trading volumes are comparable with some traditional asset classes. Concerning this, the liquidity and pricing profile is ominously straddling between volatility and illiquidity.
To address this, institutions and sovereigns have tried to regulate parts of the cryptoverse. For example, the Basel, Madrid and Paris-based financial standard-setting bodies have been attempting to fathom cryptoassets’ supervisory risk dimensions. Similarly, the IMF has been pointing out risks to capital flow management and has discussed what could be some elements of effective policies for cryptoassets. Some have heeded this warning and implemented comprehensive regulations (Japan and Switzerland), while others are in the preliminary stages (European Union, UAE, UK and the US). However, these are independent or ad hoc frameworks rather than one guided by a unified global framework.
Why is a global approach the way to go?
First is the fact that the cryptoverse is without borders. Each new crypto tool scales up through a different channel and crosses into new domains and territories. Such operating mechanics limit the effectiveness of national approaches. Uncoordinated growth will only alter the composition and mode of retail capital flows, distort external sector accounts, put financial stability at risk, and impair consumer confidence.
Second is the risk of contagion and cross-border spillovers. The cryptoagion risk is high without universally agreed technological and legal specifications and prudential definitions of exposures and counterparties. Capital flow and macroprudential measures or foreign exchange management tools are not designed for the cryptoverse. They will be blunt instruments to control any dislocation in global financial flows via the cryptoverse. Some G20 members also face a monetary management risk in the case of currency substitution through cryptoassets (akin to dollarisation).
Third is the need for consistent and uniform data and the ironing out of accounting, collateral and valuation problems across markets. The data gap problem comes atop data gaps and consistency issues in the regulated sector. Should this uniformity be based on the principle ‘same activity, same risk, same regulation?’ The jury is out, but what is clear is that the market overseers and the consumer need a better quantitative handle on cryptoverse activities.
With these three concerns in mind, what will it take for a global approach to succeed and how can the G20 play a role in this? Undoubtedly international consensus is inherently complex, especially on issues requiring timely and consistent implementation. As the G20 pushes the agenda, it should keep the three Cs in view.
Comprehensive: The new guidance must be analytically and conceptually strong. It must cover the legal, tax and prudential aspects as well as technological, accounting and judicial prerequisites – a piecemeal response (such as just on regulation) will spur crypto actors to walk through the loopholes.
Compliance: The post-G20 standard must be enforceable and put to work early. To signal that the G20 leaders are fully committed, a programme like the World Bank-IMF Financial System Assessment Programme or the Basel Committee’s novel Regulatory Consistency Assessment Programme (with the involvement of FATF) should become global mechanisms for the observance of international crypto norms.
Consistency: Communication and crypto literacy are vital to explain and shape consumer behaviour, especially in advancing and lesser-developed economic systems. A streamlined set of concepts and definitions are essential. It will facilitate implementation, communication with crypto users and disclosure.
Suppose India and the G20 are successful by the end of the year and a uniform and comprehensive approach comes about, it may reassure the users of cross-border financial services that the next global financial crisis need not originate out of the cryptoverse. Meanwhile, the widespread use of crypto products and services must be managed early and globally coordinated before a systemic risk arises. A well-designed, adequately communicated and effectively implemented G20 global framework is a step in the right direction.
Note: ‘Moon’ and ‘Lambo’ have become part of the crypto parlance. A digital asset is said to be going to the “Moon” when the asset holder believes that dramatic price increases are likely. The phrase “Lambo” is a way to ask a crypto asset holder when they will sell and become rich (Lambo is a take on the expensive, super luxurious car Lamborghini). The usage was common around 2017 — when values spiked to create a milestone in the cryptocurrency’s long story.