The recent collapse of crypto exchange FTX and the ensuing selloff in crypto markets have focused attention on vulnerabilities in the crypto ecosystem, said the Economic Survey 2022-23 tabled in Parliament on Tuesday.
crypto The assets are self-referencing instruments and do not strictly meet the criteria for being financial assets as there are no internal cash flows associated with them.
US regulators have disqualified Bitcoin, ether and various other crypto assets as securities.
A rare joint statement by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) on January 3, 2023, highlighted their concerns about crypto-asset risks to the banking system, it noted Gone.
The geographically widespread nature of the crypto ecosystem necessitates a common approach to the regulation of these volatile instruments, and the global response to crypto is evolving, it said.
Noting that crypto assets are new forms of digital assets implemented using cryptographic techniques, the survey states that its market has been very volatile, with a total valuation of around $3 trillion in November 2021 (approximately 2,45, 35,900 crores) has fallen short of Rs. Over $1 trillion (roughly Rs. 81,78,500 crores) by January 2023.
The volatility of the crypto asset ecosystem has brought to the fore their fragile support and governance problems, as well as increasing complexity and non-transparency.
With the associated financial stability risks rising, the issue of crypto asset regulation has recently advanced the policy agenda of many countries. International forums such as the OECD and the G20 are discussing a globally coordinated approach to regulating crypto assets, it noted.
monitoring and regulation cryptocurrency has been difficult, and regulators around the world find it challenging to keep track of new and emerging issues in an increasingly uncharted territory, it said.
While the crypto asset was ostensibly designed to fragment traditional financial services, it has created new unregulated intermediary entities, it said, adding the promise of decentralization has yet to be realized in practice.
New centralized intermediaries, such as crypto asset exchanges, wallet providers and crypto conglomerates, require users to trust centralized entities, it said.
The growing importance of these entities may compel regulators to consider them as systemic financial market infrastructure (FMI), however, the fact that they are still largely unregulated is a cause for concern globally.
Interestingly, it has been said that the holding of crypto assets is mainly concentrated in the hands of a few ‘whales’.
Estimates suggest that about 85 percent of all circulating bitcoin is held by 4.5 percent of entities, and the underlying protocols used to create crypto assets may also conflict with other public policy objectives, for example, ‘mining’ crypto. Huge energy intensity of the property.
It stated that minimum global standards applied to non-backed crypto assets do not currently mitigate all risks and vulnerabilities.
“Even as standard-setting bodies (SSBs) are making efforts to adjust and develop standards, these are mainly related to specific issues (financial integrity), sectors (payments, securities and banking), products ( global stable coins), or entities designated as systemic by domestic authorities,” it said.
Thus, there are regulatory gaps at every stage when crypto assets are issued, transferred, exchanged, or stored by non-bank entities. The cross-sector and crossborder nature of crypto limits the effectiveness of uncoordinated national approaches, it said.
The terminology used to describe the various activities, products and stakeholders is not globally consistent. The term “crypto asset” itself refers to a broad spectrum of digital products that may require the attention of multiple domestic regulators depending on their actual or intended use.