India emerges as a leader in global crypto framework efforts

The global community is searching for a unified policy approach to crypto-assets. India, as G20 president, emerges 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 with developing a joint “synthesis” document on the crypto-asset ecosystem within seven months. India has rightly insisted that any global policy approach must go beyond regulation and oversight and cover the macroeconomic aspects of crypto-assets. A new international financial standard is thus achievable by the end of India’s G20 presidency.

India’s concern about the global regulation of the cryptoverse, which includes all economically relevant crypto-related offerings, is reasonable and the urgency in this matter is justified. In just a few years, the cryptoverse has grown from a few digital assets to a variety of cryptocurrencies and assets, and several technology-based experiments are underway.

The international discourse surrounding the growth of the cryptoverse is divided. Proponents argue that crypto can be a tool to promote social justice and sustainability. Others dismiss this notion as a bold claim until more is understood and regulations are established. In its guidance letter on crypto-active activities issued in late 2022, the Federal Reserve told banks: “Don’t jump in and plan to figure out risk management later.”

Nevertheless, this division has not yet deterred the growth of the cryptoverse. Some estimates put the total market capitalization at around $3 billion – a small part of the global financial system, but growing. The evolving crypto landscape shows significant operational differences across markets. Over 6000 tokens are in circulation and new crypto products are launched daily. Trading volumes are comparable to some traditional asset classes. When it comes to this, the liquidity and price profile is ominously between volatility and illiquidity.

To solve this, institutions and sovereigns have tried to regulate parts of the cryptoverse. For example, the Basel-, Madrid-, and Paris-based financial standards bodies have sought to understand cryptoassets’ supervisory risk dimensions. Similarly, the IMF has pointed to risks to capital flow management and has discussed what could be some elements of effective guidelines for cryptoassets. Some have heeded this warning and implemented comprehensive regulations (Japan and Switzerland), while others are in the initial stages (EU, UAE, UK and USA). However, these are independent or ad hoc frameworks rather than one governed by a unified global framework.

Why is a global approach the way to go?

First is the fact that the cryptoverse is borderless. Each new crypto tool scales up through a different channel and crosses into new domains and territories. Such operational mechanics limit the effectiveness of national approaches. Uncoordinated growth will only change the composition and mode of retail capital flows, distort external sector accounts, jeopardize financial stability and undermine consumer confidence.

Secondly, there is the risk of infection and cross-border spillovers. The encryption risk is high without universally agreed technological and legal specifications and proper definitions of exposures and counterparties. Capital flows and macroprudential measures or currency management tools are not designed for the crypto overview. They will be blunt instruments to control any dislocation in global financial flows via the crypto overview. Some G20 members also face a monetary governance risk in case of currency substitution through crypto-assets (similar to dollarization).

Third is the need for consistent and unified data and the elimination of accounting, security and valuation issues across markets. The data gap problem comes on top of data gaps and consistency issues in the regulated sector. Should this uniformity be based on the principle of “same activity, same risk, same regulation?” The jury is out, but what is clear is that market regulators and the consumer need a better quantitative grasp of 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? Arguably, international consensus is inherently complex, especially when it comes to issues that require timely and consistent implementation. As the G20 pushes its agenda, it should keep the three Cs in mind.

Comprehensive: The new guidance must be analytically and conceptually strong. It needs to cover the legal, tax and regulatory aspects as well as technological, accounting and legal prerequisites – a piecemeal answer (like only on regulation) will spur crypto players to go through the loopholes.

Compliance: The post-G20 standard must be enforceable and put into action early. To signal that the G20 leaders are fully engaged, a program such as the World Bank-IMF Financial System Assessment Program or the Basel Committee’s new Regulatory Consistency Assessment Program (with the involvement of the FATF) should become global mechanisms for compliance with international crypto norms.

Consistency: Communication and cryptography are essential to explain and shape consumer behavior, especially in advanced and less developed economic systems. A streamlined set of concepts and definitions is essential. It will facilitate implementation, communication with crypto users and disclosure.

Assuming India and the G20 succeed by the end of the year and a unified and holistic approach is achieved, it could reassure users of cross-border financial services that the next global financial crisis need not come from the cryptoverse. Meanwhile, the widespread use of crypto products and services needs to be managed early and globally coordinated before a systemic risk occurs. A well-designed, adequately communicated and effectively implemented global framework for the G20 is a step in the right direction.

Udaibir Das is former Assistant Director and Advisor, Department for Money and Capital Markets at the International Monetary Fund. He is a Non-Resident Fellow at ORF America, Senior Non-Resident Adviser at the Bank of England and Senior Non-Resident at the National Council of Applied Economic Research.

* ‘Moon’ and ‘Lambo’ have become part of the crypto language. A digital asset is said to “go to the moon” when the asset holder believes dramatic price increases are likely. The term “Lambo” is a way of asking when an asset holder wants to sell and get rich (Lambo is a variant of the expensive super-luxury car Lamborghini). Its use came around 2017 when values ​​increased to create a milestone in the long history of cryptocurrency.

This article was originally published here.