The Evolution of Regulatory Policies for Crypto-Assets, According to IMF and FSBby Johanan Devanesan October 12, 2023
In a world entwined with technological evolution, crypto-assets have emerged as a key player, with their existence spanning over a decade reflecting both significant opportunities and multifaceted risks. The International Monetary Fund (IMF) and the Financial Stability Board (FSB) have been at the forefront of creating advanced policy and regulatory recommendations to help identify and respond to the macroeconomic and financial stability risks associated with crypto-assets.
The IMF has diligently outlined integral elements of a suitable policy response, which includes considerations relating to macroeconomics, law, financial integrity, and implications for monetary and fiscal policies. These initiatives are crucial in addressing the contemporary challenges posed by the volatile nature of crypto-assets, which have exhibited dramatic fluctuations, with instances of sharp appreciation followed by steep price reversions.
The most recent market surge in 2021 witnessed the total market value of crypto-assets increase 3.5-fold, before shrinking rapidly starting in May 2022. The total market value was wiped out from a peak of US$2.6 trillion to below US$1 trillion — highlighting the intense volatility inherent in this domain.
Addressing Crypto-Asset Volatility and Complexity
This unrelenting volatility is paired with an escalation in the complexity of crypto-asset activities. The entities issuing these assets and the service providers in this domain are undertaking a plethora of functions and activities, enhancing the interconnectedness of crypto-asset markets. Particularly, stablecoins which aim to maintain a stable value, emerge as pivotal points of interconnectedness between various crypto-asset activities.
Given this context, regulatory mechanisms are of paramount importance. They not only support the functionality of capital flow measures, fiscal, and tax policies but also uphold financial integrity requirements, mitigating the criminal and terrorist misuse in the crypto-assets sector. The recommendations from the IMF and the FSB advocate for comprehensive governance frameworks, effective risk management, and robust data frameworks, which are integral to addressing all material risks associated with the activities and ensuring proper regulation, supervision, and oversight.
Establishing Global Standards for Crypto-assets
With the Indian G20 Presidency at the helm, a synthesised paper has been developed encompassing the policy recommendations and standards of the IMF and the FSB. This collective suite of recommendations is meticulously designed to provide extensive guidance to help authorities mitigate the macroeconomic and financial stability risks engendered by crypto-asset activities and markets. This is imperative, especially in light of the repercussions associated with stablecoins and the operations conducted through decentralised finance (DeFi).
Additionally, the enhancement of regulation and supervision for registered crypto-asset issuers and service providers is vital. This enables adherence to the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing standards applicable to virtual assets and their service providers, contributing to a secure financial environment.
Risks to the Financial System
Addressing the potential risks to financial integrity is crucial. This involves implementing measures to counteract the possible criminal and terrorist exploitation of the crypto-assets sector. Some jurisdictions, notably emerging markets and developing economies, may need to implement additional targeted measures to counter specific risks, particularly if they are grappling with elevated macro-financial risks emanating from crypto-assets.
Furthermore, the impact of price volatility within the realm of crypto-assets remains predominantly contained within its markets. Direct connections between crypto-assets and significant financial institutions and market infrastructures have been relatively limited. However, this scenario can swiftly change if crypto-assets gain momentum in realms like payments or retail investments, potentially emerging as a source of systemic risk in specific jurisdictions.
Enhancing Framework Stability and Protecting Stakeholders
Policymakers globally are harnessing their efforts to fortify financial stability and integrity while safeguarding consumers, investors, and the broader financial system in anticipation of the widespread adoption of crypto-assets. This involves applying comprehensive and effective regulation, supervision, and oversight requirements, along with fostering efficient communication, information sharing, and consultation both domestically and internationally.
Users and pertinent stakeholders must be endowed with comprehensive, clear, and transparent information regarding crypto-asset markets and services. In instances where legal certainty is elusive, it is pivotal for jurisdictions to consider actions that may encompass law reforms developed in conjunction with the private sector and aligned with international organisations’ guidance.
Legal frameworks need to be modernised to elucidate the classification of crypto-assets and the rules governing their transactions. Any gaps should be addressed by amending existing laws to explicitly cover specific activities related to crypto-assets or by issuing bespoke laws on crypto-assets or on financial technologies, enhancing clarity and certainty in tax laws to achieve a country’s specific policy objectives.
Ensuring Compliance and International Cooperation
Jurisdictions are mandated to comply consistently with FATF Standards and engage in effective international cooperation. The IMF is committed to continue advising members on crypto-related financial integrity issues and supporting them in implementing effective anti-money laundering and counter-terrorist financing frameworks through capacity-building activities. It is also crucial that blanket bans on all crypto-asset activities, such as trading and mining, are carefully contemplated as they can be costly and technically demanding to enforce.
Following the endorsement of the FSB’s high-level recommendation by the G20 in July 2023, both the IMF and the FSB are poised to promote the implementation of these policy recommendations to governments and regulators worldwide. The IMF, in alignment with its ongoing policy work on crypto-assets, will integrate the FSB recommendations as part of its capacity-building programs, providing training and technical support to its members, and fostering the implementation of policy recommendations for crypto-assets.
As nations continue to traverse the multifaceted landscape of crypto-assets, the meticulous implementation of structured regulatory frameworks and international cooperation is pivotal. This not only addresses the inherent risks but also facilitates the exploration of the immense potentials that crypto-assets harbour, fostering a balanced coexistence within the global financial ecosystem.
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