Opinion Crypto

Is global crypto regulation on the cards?

The IMF is taking a leading, and conservative approach to crypto regulation, writes Helen Femi Williams.

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The G20

After February's G20 conference in India, member states announced global standards for cryptocurrency regulation had been recommended by the International Monetary Fund (IMF). 

Days after the collapse of crypto-friendly banks Signature Bank, Silicon Valley Bank (SVB), and Silvergate Bank, a report ''Macrofinancial Implications of Crypto Assets' and 'Elements of Effective Policies for Crypto Assets' was published. 

Additionally, the Financial Stability Board recommended creating a regulatory framework for crypto assets. It said crypto assets should be subject to commercial banking regulations, indicating bodies are taking a stand on regulating crypto assets in October last year,

This article examines the IMF's conservative crypto approach, the member states' response, and what's next for global crypto regulation. 

Member states have largely accepted the IMF's call for caution. However, there is still some disagreement on how best to regulate the crypto industry. In the coming months, the IMF will continue to work with governments to develop a unified approach to crypto regulation.

IMF reports

Amid severe turmoil in the crypto market and repeated cycles of boom and bust in the ecosystem around digital assets, the two recent IMF reports on regulating the crypto ecosystem are particularly pertinent.

The 'Elements of Effective Policies for Crypto Assets' report emphasises the need for tighter regulation.

It sets forth a framework of nine elements to help members develop a coordinated policy response, among other guidelines around achieving macroeconomic stability, financial stability, consumer protection, and market and financial integrity for crypto assets.

The IMF also warns against using crypto as legal tender, especially in unstable economies, out of fears about tax withholdings and the potential fluctuation of importation prices due to market whims. 

"Adopting a crypto asset as official currency or legal tender could affect a government's social policy objectives, particularly for unbacked tokens, as their high price volatility could affect poor households more. The adoption of a crypto asset as a legal tender, which would allow the government to use it as a means of payment, could also significantly impact public financial management," the report explains. 

Joe Ziolkowski, the CEO and co-founder of Relm Insurance, the first digital asset insurer licensed under the Bermuda Monetary Authority's innovation framework, thinks this notion that digital assets threaten global financial stability is misplaced. 

"The IMF report recommends that policymakers harness the potential benefits of the technological innovation associated with cryptocurrencies,” he said. 

“So a commonsense approach to crypto and integrating it into the broader global financial and economic systems are warranted but one that tamps down fraud, money laundering, and other nefarious uses but also sustains the promise inherent in this innovative technology," he said.

Countries' responses 

In the past, the issue of regulating cryptocurrencies is divided between countries, with some calling for a ban while others advocating a robust regulatory framework to protect financial stability and monetary sovereignty. 

As it stands, nine countries, namely Algeria, Bangladesh, China, Egypt, Morocco, Nepal, Qatar and Tunisia, have banned cryptocurrencies outright. Other jurisdictions, such as Australia, Bahamas, Greece, Romania, the Philippines and Uzbekistan, have imposed income taxes on capital gains derived from cryptocurrency trading. Additionally, crypto exchanges are becoming subject to anti-money laundering and anti-terrorist financing laws.

And so, the G20 and the recommendations of the IMF could be significant in shaping future policy. For instance, Indian Prime Minister Narendra Modi's government has debated regulating cryptocurrencies or banning them altogether in a bill known as 'Regulation of Offical Digitial Currency;  and proposed imposing fines for those carrying or connected to crypto in official

This discussion at the G20 has just brought back attention to this issue, especially since India is this year's G20 president and therefore led conferences.

Furthermore, US Secretary of the Treasury Janet Yellen said that a robust regulatory framework was necessary, but the United States had not proposed an outright ban. 

At the state level, however, the Illinois legislature is considering a crypto license regime similar to New York's BitLicense. At the same time, South Dakota opposes acknowledging cryptocurrencies as money in line with recent calls from the International Monetary Fund (IMF).

the governor of South Dakota, has used her authority to veto legislation to change the definition of money to exclude cryptocurrencies.

Timo Lehes, the co-founder at Swarm Markets, said harmonisation of regulations is no bad thing as this will make it easier for firms to operate internationally as standards are applied in a unified way. 

By having a unified set of regulations, companies will be able to comply with the same standards no matter what country they are in. This will make it easier for them to operate across borders and increase their ability to do business.

"A higher level blueprint from regulations is welcome, though, as this will encourage more countries to move forward with national legislation that formalises regulation of the sector at a crucial time for its development," he said. 

Japan calls for a streamlined approach 

In light of ongoing concerns about the potential risks crypto assets pose to the global financial system, the G7 has accelerated discussions related to cryptocurrency to hold a meeting of finance ministers and central bankers in mid-May, just days before this year's summit in Hiroshima hosted by Japanese Prime Minister Fumio Kishida. 

As host countries can add items to the summit's agenda, Kyodo News reports that Japan will push for global crypto regulation, as seen with India at the G20 earlier this year.  

While a streamlined approach makes sense to Ziolkowski, finding the right balance is the key. "A commonsense approach to crypto and integrating it into the broader global financial and economic systems are warranted – one that tamps down fraud, money laundering, and other nefarious uses but also sustains the promise inherent in this innovative technology. 

What's next?

Alex Pawlowski, program director at Best of Blockchain, says the IMF is missing the complete focus and that they should pay attention to how DeFi has clearly benefited the financial sector and how individuals are benefiting from it. 

As a result, the IMF has a critical role in coordinating and advancing the development of DeFi within the financial sector.

Despite the conservative approach taken by the IMF in both reports, responses from countries indicate some appetite or potential for streamlined regulation, but the question remains how to strike a balance between innovation and regulation. 

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