Echoing what India suggested recently, a blog published by the International Monetary Fund (IMF) has called for a coordinated regulatory framework designed to mitigate crypto risks. The blog-post authors Tobias Adrian, Dong He and Aditya Narayan warn of the impact that unregulated circulation of crypto tokens can have on financial stability, especially in emerging markets. To the extent that these views reflect the Fund’s internal discussions, we can assume that they may influence its official stance on matters important to the future of finance. The puzzle of crypto valuation is one of many confounds. Regulators must deal with a range of issues ranging from investor safety and security of crypto exchanges and wallets to ambiguity and lies concerns over the reserves held by some crypto issuers to back their stablecoins. The blog broadly suggests that crypto assets should be regulated separately from digital tokens that serve as a medium of exchange. Within this frame, its proposals include licensing of crypto-asset service providers involved in their storage, transfer, etc., and systematic custody of assets, as regulations often require of other asset classes.
A distinction based on function should provide the clarity needed for a practical approach. Therefore, crypto held as an investment can be used for payment by the country’s market regulator, in our case the Securities and Exchange Board of India, and its monetary authority, which for us would be the Reserve Bank of India. Since the Internet is borderless, however, crypto cannot be kept under adequate surveillance without some worldwide cohesion. This explains why Indian Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman called on all countries to come together and address the challenges posed by crypto adoption. A paradigm of national currencies acting—or trying to function—with exchange rates as modulators of trade and capital flows may shake itself off an online system of e-chips that can move capital around and Valuable goods can be traded for—and even among themselves—places that cannot be pinned to the world map. Since crypto tokens are accessible anywhere via the web, hidden theft enables capital flight, a threat that only advanced economies need not bother about. If the cryptosphere gets a free run then external remittance constraints will be meaningless.
It makes sense for crypto capital to take action before it has a chance to affect macro-level results, but various policies around the world can create a mess of rules that leave sly dodgers laughing at their online vaults. The global gap would clearly undermine regulation. For effectiveness, general principles should guide supervision everywhere. In the words of the blog, the rules we adopt should be “comprehensive, consistent and coordinated”. Given the IMF’s pre-eminent role as policy advisor and regulator for the global economy, it is best suited to lead a coordinated global effort. Approach to crypto governance. Each jurisdiction will enforce its own laws, ultimately. The government of India, for example, has its own regulatory legislation in the works. While hints of its emphasis have been left out, with stablecoins being banned while crypto assets are treated as securities, we don’t know what shape our regulations will eventually take. An important caveat in devising these is that innovation in their underlying blockchain technology should not be suppressed. Comprehensive agreement on this point would also help.
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