New Delhi: Countries should not make cryptocurrencies legal tender in order to preserve their financial stability, the International Monetary Fund (IMF) and the Financial Stability Board (FSB) have recommended in a joint paper submitted to the G20 nations.
The recommendations in the paper, covering all aspects of cryptocurrency regulation, are expected to be discussed during the G20 leaders’ summit in New Delhi on 9-10 September. The submission of the paper goes a long way towards the finalisation of a global roadmap for the regulation of cryptocurrencies.
The Indian government, using its presidency of the G20 in 2023, has been pushing for a global framework for the regulation of cryptocurrencies.
During discussions through the year by the G20 Finance Ministers and Central Bank Governors (FMCBG), India had asked the IMF and FSB to issue a “synthesis paper” that would include the broad contours of the regulations and a roadmap for their implementation.
That paper has been submitted to the G20 and was made public Friday.
A highly placed source in the Ministry of Finance told ThePrint that the G20 members were close to a consensus on cryptocurrency regulation and all that was remaining was a final approval.
In the paper, the two bodies lay out the various risks associated with cryptocurrencies, their widespread adoption by individuals as well as governments, and also prescribe areas of regulation that governments should focus on.
“Widespread adoption of crypto-assets could undermine the effectiveness of monetary policy, circumvent capital flow management measures, exacerbate fiscal risks, divert resources available for financing the real economy, and threaten global financial stability,” the paper states.
“These risks could reinforce each other, as financial instability can make maintaining price stability more difficult and vice versa; cause destabilising financial flows; and strain fiscal resources,” it adds.
In order to address these varied and significant risks, the IMF and FSB have emphasised the need for a comprehensive policy and regulatory response by governments.
“To address macroeconomic risks, jurisdictions should safeguard monetary sovereignty and strengthen monetary policy frameworks, guard against excessive capital flow volatility and adopt unambiguous tax treatment of crypto-assets,” the paper says.
It adds that comprehensive regulatory and supervisory oversight of crypto-assets can help address financial stability and financial integrity risks.
“To address risks to financial integrity and mitigate criminal and terrorist misuse of the crypto-assets sector, jurisdictions should implement the Financial Action Task Force (FATF) anti-money laundering and counter-terrorist financing (AML/CFT) standards that apply to virtual assets (VAs) and virtual asset service providers (VASPs),” the paper states.
The report suggests that some jurisdictions, especially emerging markets and developing economies, might want to take additional targeted measures that go beyond the global regulatory baseline to address specific risks.
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Key risks to financial system
According to the paper, many of the benefits that were supposed to have arisen due to the rise of cryptocurrencies have not yet materialised.
“Crypto-assets are purported to bring a wide range of benefits, including cheaper and faster cross-border payments, increased financial inclusion and greater portfolio diversification,” the paper says, adding that other purported benefits were greater operational resilience, and increased transparency and traceability of transactions.
“However, a consideration of these purported benefits suggests that many have not yet materialised,” it points out.
The paper then lists the numerous risks to financial systems of individual countries and groupings of countries that the widespread adoption of cryptocurrencies could pose.
“The transmission of monetary policy would weaken if firms and households prefer to save and invest in crypto-assets that are not pegged to the domestic fiat currency or to use them as payment instruments or medium of account (IMF 2020),” it says.
Amid the ongoing discussion about the possibility of countries adopting cryptocurrencies as legal tender, the IMF and FSB suggest that such a move would entail “significant implications for monetary stability”.
The paper continues with its dire warnings, stating that new fiscal risks can arise from the exposure of a country’s financial sector to the cryptocurrency ecosystem, adding that such crypto-assets could hurt tax revenue collections and compliance, even when not adopted as legal tender.
Main recommendations for governments
The paper makes a number of broad policy recommendations for countries looking to curtail the proliferation of private cryptocurrencies, and limit their risk to the financial system. These include steps to safeguard monetary sovereignty and stability, guard against excessive volatility in capital flows, address fiscal risks, and implement clear tax rules for cryptocurrencies.
“Developing effective frameworks and policies is the best way to limit substitution into crypto-assets,” the paper advises. “Robust macroeconomic policies and credible institutional frameworks are fundamental to protect monetary sovereignty.”
Significantly, the paper recommends against giving cryptocurrencies official currency or legal tender status.
“Official means of payment should be limited to public currencies issued by the state,” it says. “Crypto-assets pose fundamental risks and should not be considered as ‘currency’, as they do not fulfil the three basic conditions thereof (unit of account, means of exchange, and store of value).”
Further, due to cryptocurrencies’ potential to destabilise the international monetary system, the paper cautions that central banks around the world should avoid holding cryptocurrency in their official reserves.
Regarding tax, the paper states that governments should arrive at “unambiguous” tax policies and should also strengthen tax compliance.
Over the last few years, India has arrived at a reasonably clear tax treatment of cryptocurrencies.
Profits arising out of the trade of cryptocurrencies are to be taxed at 30 percent, and losses cannot be offset against these profits. That is, if you lose money trading in one cryptocurrency, you cannot reduce that loss from the profits you made trading in another cryptocurrency as far as tax is concerned. You will have to pay 30 percent on the total profit you made.
Further, there is 1 percent tax deducted at source (TDS) imposed on all cryptocurrency transactions.
“The FSB and the SSBs (standard-setting bodies) have developed a shared work plan for 2023 and beyond, through which they will continue to coordinate work, under their respective mandates, to promote the development of a comprehensive and coherent global regulatory framework commensurate with the risks crypto-asset markets and activities may pose to jurisdictions worldwide, including through the provision of more granular guidance by SSBs, monitoring and public reporting,” the paper says.
(Edited by Nida Fatima Siddiqui)
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