In a policy paper developed under India’s G20 Presidency to establish a global framework for handling crypto assets, concerns about the potential impact of cryptocurrencies on national monetary policies are raised. The paper suggests licensing crypto service providers and encourages the adoption of the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing (AML/CFT) standards within the sector.
This policy paper, authored by the International Monetary Fund (IMF) and the Financial Stability Board (FSB) at the request of the Indian G20 Presidency, also highlights that an outright ban on cryptocurrencies may not be effective due to their borderless nature. It is noteworthy that Finance Minister Nirmala Sitharaman recently called for the establishment of a framework to address crypto asset challenges.
New Delhi intends to seek consensus on the policy paper’s recommendations from world leaders who will gather in India for the final segment of the G20 Summit this week. The G20 nations are expected to deliberate on this policy paper, which was previously discussed at the meeting of finance deputies in New Delhi on September 5-6 before the Leaders’ Summit.
The paper expresses concerns about the potential impact of crypto assets on the financial stability of nations, stating that widespread adoption of cryptocurrencies could undermine monetary policy, circumvent capital flow management measures, exacerbate fiscal risks, divert resources from the real economy, and threaten global financial stability. To address these macroeconomic risks, the paper recommends safeguarding monetary sovereignty, strengthening monetary policy frameworks, guarding against excessive capital flow volatility, and adopting clear tax treatment of crypto assets.
To mitigate risks related to financial integrity and the misuse of crypto assets for criminal and terrorist purposes, the paper suggests implementing FATF AML/CFT standards applicable to virtual assets (VAs) and virtual asset service providers (VASPs).
However, the paper discourages outright bans on crypto assets, as such bans can be costly, technically challenging to enforce, and may create incentives for circumvention due to the borderless nature of cryptocurrencies. Blanket bans could also lead to activity shifting to other jurisdictions, resulting in spillover risks. Therefore, it recommends that the decision to ban should be based on a thorough assessment of money laundering and terrorist financing (ML/TF) risks and other considerations.
While the paper advises against outright prohibitions, it acknowledges that some jurisdictions, especially emerging markets and developing economies (EMDEs), may wish to implement additional targeted measures beyond global regulatory standards to address specific risks. It also suggests that crypto-asset service providers should be licensed or registered and adhere to all relevant requirements, emphasizing that regulation and supervision of such providers can support the functioning of capital flow measures, fiscal policies, and financial integrity requirements.
The paper also addresses concerns about stablecoins, which are pegged to the value of fiat money, potentially posing threats to currency replacement or bank runs in emerging economies. It warns that foreign currency-denominated stablecoins could lead to rapid capital flight and emphasizes the need for jurisdictions to monitor and regulate these instruments effectively.