Priya Aditi
The majority of G20 members now agree with India’s central bank that crypto currencies pose significant risks to the stability of the financial system, according to people with knowledge of the development. These countries may work to institutionalise an internationally-accepted regulatory framework for crypto-assets while allowing individual jurisdictions to impose stricter regulations, or even a complete ban.
Most countries have realised the macroeconomic risks and other challenges associated with cryptocurrencies, at least three individuals with direct knowledge of the matter said on condition of anonymity, sharing insights from and details of discussions at the third meeting of the G20 Finance Ministers and Central Bank Governors (FMCBG) held in Gandhinagar last week.
“Many countries are also concerned about the recent collapse of cryptocurrency exchanges and the risks of cryptocurrencies being used for drug trafficking, terror financing, and money laundering,” said one of them. FTX, the second-largest cryptocurrency exchange in the world, failed in November 2022, affecting over one million investors.
A second person stated that specialists will evaluate the financial and macroeconomic risks associated with cryptocurrencies and make recommendations on how to mitigate them before the G20 considers the matter. He added that the International Monetary Fund (IMF) and the Financial Stability Board (FSB) are analysing crypto-related issues and will submit a “synthesis paper” on the subject later this year. The approach to synthesis will encompass two general aspects: crypto regulations and financial stability.
Several nations’ perspectives on cryptocurrencies have shifted significantly, according to the initial speaker. “Now, the majority of them share RBI’s [Reserve Bank of India] concerns regarding the financial and other dangers associated with cryptocurrencies. This topic was discussed in considerable depth at the third G20 FMCBG meeting,” he said.
The issue was mentioned in the outcome document and chair summary of the third G20 FMCBG meeting held on July 18: “We look forward to receiving the IMF-FSB Synthesis Paper, including a Roadmap, before the Leaders’ Summit in September 2023, to support a coordinated and comprehensive policy and regulatory framework taking into account the full range of risks, and risks specific to emerging market and developing economies (EMDEs), and ongoing global implementation of FATF standards.”
Two recent reports on cryptocurrencies presented to the G20 FMCBG at its July meeting – one by the Financial Stability Board (FSB) and the other by the Bank for International Settlements (BIS) – reportedly highlighted the need to develop a robust regulatory mechanism that would also address macroeconomic risks.
The members endorsed the FSB’s high-level recommendations for the regulation, supervision, and oversight of crypto-asset activities at the meeting, according to the first individual quoted. “Risks associated with crypto-assets were not discussed,” he said. The recommendations “do not comprehensively cover all specific risk categories related to crypto-asset activities, such as: AML/CFT [anti-money laundering/combating the financial terrorism]; data privacy; cyber security; consumer and investor protection; market integrity; competition policy; taxation; monetary policy; monetary sovereignty and other macroeconomic concerns,” according to the FSB.
The G20 FMCBG also welcomed the BIS report titled ‘The Crypto Ecosystem: Key Elements and Risks’, which examines the crypto ecosystem’s key elements, evaluates its structural defects, and identifies the risks it poses. The report concludes that “crypto has thus far failed to leverage innovation for the benefit of society” and that “crypto’s inherent structural flaws render it unfit to play a significant role in the monetary system.”
“Crypto remains predominantly self-referential and does not fund actual economic activity. It has inherent flaws in terms of stability and efficacy, as well as accountability and honesty. These structural flaws are the consequence of incentives’ underlying economics rather than technological limitations, according to the BIS report.
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While the Reserve Bank of India (RBI) has already expressed concern over the negative impact of cryptocurrencies on the Indian economy, the Union government believes that a unilateral ban or regulation would be ineffective due to the borderless nature of cryptocurrencies, and that international cooperation is necessary to prevent regulatory arbitrage.
