Crypto-assets have implications for macroeconomic, financial stability: IMF-FSB Paper

Ahead of the G20 Summit in New Delhi on September 8, the International Monetary Fund, along with the Financial Stability Board (FSB), has released advanced policy and regulatory regulations to identify and respond to macroeconomic and financial stability risks associated with crypto assets.

Crypto assets will be amongst the key agendas that will be discussed in the three-day summit between September 8 and September 10 under India's G20 Presidency. The paper says crypto assets have implications for macroeconomic and financial stability that are mutually interactive and reinforcing. According to the paper, widespread adoption of crypto-assets could undermine the effectiveness of the monetary policy, circumvent capital flow management measures, exacerbate fiscal risks, divert resources available for financing the real economy and threaten global financial stability. "These risks could reinforce each other, as financial instability can make maintaining price stability more difficult and vice versa; cause destabilising financial flows; and strain fiscal resources," says the paper.

As per the paper, while some authorities have considered implementing targeted or time-bound broad restrictions to manage the risks from crypto assets, the ban is not an ‘easy option’. "Blanket bans that make all crypto-asset activities (e.g., trading and mining) illegal can be costly and technically demanding to enforce. They also tend to increase the incentives for circumvention due to the inherent borderless nature of crypto-assets, resulting in potentially heightened financial integrity risks, and can also create inefficiencies. Bans in one jurisdiction could also lead to activity migrating to other jurisdictions, creating spillover risks," says the paper.

"A decision to ban is not an “easy option” and should be informed by an assessment of money laundering and terrorist financing (ML/TF) risks and other considerations, such as large capital outflows and other public policy aims," it adds.

According to the IMF, targeted restrictions could be justified to manage specific risks for resource-constrained authorities or to support regulatory frameworks. "Targeted restrictions might be warranted in the short run while countries increase internal capacity (including knowledge and awareness) in anticipation of regulation," says the paper.

As per the paper, even when jurisdictions contemplate a temporary imposition of restrictions, such restrictions should be considered as part of a larger policy response. "Restrictions should not substitute for robust macroeconomic policies, credible institutional frameworks, and comprehensive regulation and oversight, which are the first line of defence against the macroeconomic and financial risks posed by crypto-assets," says the paper.

The paper also calls for adopting unambiguous tax treatment of crypto assets and policy framework to guard against excessive capital flow volatility.

The domestic crypto industry, which is at loggerheads with the government over crypto regulations says that the recommendations are a collaborative effort towards effective, adaptable, and coordinated implementation of a comprehensive policy.

"These recommendations represent a significant leap forward in establishing a more comprehensive regulatory framework for crypto service providers and investors, emphasizing the importance of coordinated oversight by local and global bodies to enhance security. India's proactive role in this initiative positions it as a leading advocate for responsible and forward-thinking cryptocurrency regulation on the global stage. This not only instills confidence in Indian investors but also globally," says Edul Patel, CEO & co-founder, Mudrex.