Understanding Crypto as India Asks IMF, FSB to Prepare Paper on Regulating Digital Currency

India, which is currently holding G20 Presidency, has asked the IMF and Financial Stability Board (FSB) to jointly prepare a technical paper on crypto assets, which could be used in formulating a coordinated and comprehensive policy to regulate them, PTI reported. The international organisations are expected to present their joint paper during the 4th Finance Ministers and Central Bank Governors Meeting in October 2023, said a finance ministry release.

“To complement the ongoing dialogue on the need for a policy framework, the Indian Presidency has proposed a joint technical paper by the International Monetary Fund (IMF) and the FSB, which would synthesise the macroeconomic and regulatory perspectives of crypto-assets. This would help in the formulation of a coordinated and comprehensive policy approach to crypto assets,” it said.

In their entirety, the IMF’s discussion paper, the policy seminar and the joint IMF-FSB paper are expected to integrate the policy questions pertaining to macro-financial and regulatory perspectives of crypto assets and facilitate a global consensus on a well-coordinated and comprehensive policy approach to crypto assets, it said.

But what is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is protected by encryption, making it nearly hard to forge or double-spend. Several cryptocurrencies are decentralised networks built on blockchain technology, which is a distributed ledger enforced by a network of computers, as per Investopedia.

The fact that cryptocurrencies are often not issued by any central body makes them potentially impervious to political meddling or manipulation.

How Does it Work?

Cryptocurrencies are based on blockchain, a distributed public ledger that keeps track of all transactions that are updated and maintained by currency holders. Mining is a technique that uses computer power to solve complex mathematical problems that earn coins to construct cryptocurrency units. Users can also purchase the currencies from brokers and use encrypted wallets to store and spend them, according to a report by Kaspersky.

You don’t possess anything concrete if you own cryptocurrency. What you have is a key that allows you to transfer a record or a unit of measurement from one person to another without the assistance of a trusted third party.

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Although Bitcoin has been around since 2009, cryptocurrencies and blockchain technology applications are still emerging in financial terms, with additional uses planned in the future. The technology could someday be used to trade bonds, equities, and other financial assets.

Lack of Comprehensive Global Policy

Despite the rapid evolution of the crypto universe, there is no comprehensive global policy framework for crypto assets. Given the concerns over greater interconnectedness between crypto assets and the traditional financial sector as well as the complexity and volatility around crypto assets, policymakers are calling for tighter regulation.

The global standard-setting bodies such as the Financial Action Task Force (FATF), Financial Stability Board (FSB), Committee on Payments and Market Infrastructures (CPMI), International Organization of Securities Commissions (IOSCO) and Basel Committee on Banking Supervision (BCBS) have been coordinating the regulatory agenda, while working within their respective institutional mandates, it said.

What Does India Hope to Do?

India hopes to broaden the G20 discussion on crypto assets beyond financial integrity concerns and capture the macroeconomic implications and widespread crypto adoption in the economy, it said, adding, this will require a data-based and informed approach to the global challenges and opportunities of crypto assets, allowing G20 members to shape a coordinated and comprehensive policy response.

To inform policymakers on the broader macroeconomic and financial stability implications of crypto assets, it said, the Indian Presidency requested the IMF to prepare a discussion paper on the topic for the 2nd G20 Finance and Central Bank Deputies Meeting held in Bengaluru on 23rd February 2023.

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“During the said meeting, a seminar titled “Policy Perspectives: Debating the Road to Policy Consensus on Crypto Assets” was held, as part of the Presidency’s efforts to broaden the dialogue around crypto assets,” it said.

The IMF speaker, Tommaso Mancini-Griffoli, presented the discussion paper during the event, highlighting the consequences of crypto adoption on the internal and external stability of a country’s economy as well as on the structure of its financial system.

Mancini-Griffoli underlined that the purported benefits of crypto assets include cheaper and faster cross border payments, more integrated financial markets, and increased financial inclusion, but these are yet to be realised.

He further added that problems with interoperability, safety and efficiency cannot be guaranteed by the private sector and critical digital infrastructure/platforms for ledgers should be viewed as a public good.

He also flagged the global information gaps pertaining to the crypto asset universe and the need to build a deeper understanding of the interlinkages, opportunities and risks pertaining to crypto assets under the aegis of the G20.

The discussions covered a wide range of topics, including the need for a common taxonomy and a systematic classification of the crypto asset universe, benefits and risks of crypto assets macroeconomic policy questions that needed to be evaluated further, and financial stability issues and regulatory responses.

The statement said that the event has helped initiate a broader dialogue on crypto assets, but also raises several pertinent policy questions that policymakers and regulators need to evaluate closely.

In addition to evaluating the consequences of crypto assets to the broader economy, it said, there is also an existential question on whether crypto assets are indeed the optimal solution for existing challenges in global financial systems.

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With inputs from PTI

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