NEW DELHI: Most of the G20 members are now in sync with India’s central bank’s view that cryptocurrencies pose major risks to the stability of the financial system.
The initial enthusiasm shown by some countries for cryptocurrencies has now waned, as most of them have recognized the macroeconomic risks and other challenges associated with them, at least three people with direct knowledge of the matter said, requesting anonymity and insights and details of the discussions.
“Many countries are concerned about the recent collapse of crypto exchanges and the risks of using cryptos for drug trafficking, terrorist funding and money laundering,” one of them said. In November 2022, FTX, the world’s second largest cryptocurrency exchange, crashed, affecting more than 1 million investors.
Cryptocurrencies have financial and macroeconomic risks that experts have assessed appropriately and the G20 will eventually take up the matter with their recommendations to mitigate them, the second person said. He added that the International Monetary Fund (IMF) and the Financial Stability Board (FSB) are analyzing crypto-related issues and will submit a “synthesis paper” on the subject later this year. The synthesis approach covers two broad aspects – crypto regulations and financial stability.
There has been a marked change in the thinking of many countries regarding cryptocurrency, the first person said. “Now most of them agree with RBI’s (Reserve Bank of India) concerns regarding financial and other risks associated with cryptos. The third G20 FMCBG meeting discussed the matter in great detail,” he said.
The issue was addressed in the outcome document and chair summary of the third G20 FMCBG meeting on July 18: “We hope to have an IMF-FSB synthesis paper, including a roadmap, before the Leaders’ Summit in September 2023. and Global Implementation of FATF Standards to Address Money Laundering and Terrorist Financing Risks (EMDE).
According to the people mentioned above, the two latest reports on cryptocurrency submitted at the July meeting of the G20 FMCBG – one by the FSB and the other by the Bank for International Settlements (BIS) – underscore the need to develop a robust regulatory system that addresses macroeconomic risks.
During the meeting, members approved the FSB’s high-level recommendations for regulation, supervision and oversight of crypto-asset activities, the first person said. “It didn’t go into the risks associated with crypto assets,” he said. The recommendations “do not comprehensively cover all specific risk categories related to crypto-asset activities, such as: AML/CFT (money laundering/combating financial terrorism); data privacy; cyber security; consumer and investor protection; market integrity; competition policy; tax; financial system; monetary sovereignty and other macroeconomic concerns,” the FSB said.
The G20 FMCBG welcomed the BIS report ‘The Crypto Ecosystem: Key Factors and Risks’, which reviews the key elements of the crypto ecosystem, assesses its structural flaws and points out the risks it poses. The report concludes that “crypto has so far failed to harness innovation for the benefit of society” and that “crypto’s inherent structural flaws make it ill-suited to play a significant role in the monetary system.”
“Crypto remains largely self-referential and does not finance real economic activity. It suffers from inherent deficiencies related to consistency, efficiency, accountability and integrity. “These structural flaws stem from the underlying economics of incentives rather than technical limitations,” the BIS report added.
Although the Reserve Bank of India (RBI) has already expressed concern about the negative effects of cryptocurrencies on the Indian economy, the central government feels that any unilateral ban or regulation will not be effective due to the borderless nature of cryptocurrencies and international cooperation is needed to curb regulatory litigation.