BackIMF cues could help the world align crypto rules
Our chance of governing digital tokens to mitigate risks effectively would depend on how closely countries coordinate their approach. The Fund could play a significant role in this
PremiumEchoing what India recently suggested, a blog published by the International Monetary Fund (IMF) has called for coordinated regulatory frameworks designed to mitigate crypto risks. The blog-post’s authors Tobias Adrian, Dong He and Aditya Narain warn of the impact that unregulated proliferation of crypto tokens could have on financial stability, especially in emerging markets. To the extent that these views reflect the Fund’s internal discussions, we can assume they may influence its official stance on a matter critical to the future of finance. The conundrum of crypto valuation is only one of many perplexities. Regulators must tackle a panoply of issues ranging from investor protection and the safety of crypto exchanges and wallets to worries of opacity and mendacity on reserves held by some crypto issuers to back their stablecoins. The blog broadly suggests that crypto assets be regulated separately from digital tokens that serve as a medium of exchange. Within this frame, its proposals include the licensing of crypto-asset service providers involved in their storage, transfer, etc, and the systemized custody of assets, as rules often require for other asset classes.
A distinction based on function should offer the clarity needed for a workable approach. So, cryptos that are held as investments could be overseen by the country’s market regulator, the Securities and Exchange Board of India in our case, and those used for payments by its monetary authority, which would be the Reserve Bank of India for us. As the internet is borderless, however, cryptos cannot be kept under adequate watch without some cohesion across the world. This explains why Indian Prime Minister Narendra Modi and finance minister Nirmala Sitharaman exhorted all countries to come together and address the challenges posed by crypto adoption. A paradigm of national currencies with exchange rates acting—or trying to act—as modulators of trade and capital flows could find itself shaken by an online system of e-chips that can swish capital around and get traded for valued stuff—and also among themselves—in spaces that cannot be pinned down on the world map. As crypto tokens are accessible anywhere via the web, hidden stashes enable capital flight, a danger that only advanced economies need not bother about. Outward remittance barriers would be pointless if the cryptosphere gets a free run.
Acting before crypto capital gets a chance to affect macro level outcomes would make sense, but varied policies around the world can create a jumble of rules that lets artful dodgers laugh all the way to their online vaults. Global gaps will clearly weaken regulation. For efficacy, common principles ought to guide supervision everywhere. In the blog’s words, the rules we adopt should be “comprehensive, consistent and coordinated". Given the IMF’s pre-eminent role as a policy advisor and regulator of sorts for the global economy, it is best suited to take leadership of a coordinated global approach to crypto governance. Each jurisdiction will enact its own laws, eventually. India’s government, for example, has its own regulatory legislation in the works. While hints of its thrust have been dropped, with stablecoins thought to be in for a ban while crypto assets get treated as securities, we do not know what shape our rules will finally take. An important caveat in framing these is that innovation in their underlying blockchain technology must not be stifled. Wide agreement on this point, too, would help.
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