A joint synthesis paper prepared by International Monetary Fund (IMF) and Financial Stability Board (FSB) has advocated for comprehensive regulatory and supervisory oversight of crypto-assets, as opposed to a blanket ban to address macroeconomic and financial stability risks. It also pitched for using norms for money laundering to check the use of crypto assets for criminal and terrorist misuse.

The paper, along with India’s Presidency note, will be taken up during G20 Leadership Summit on September 9-10 in Delhi. This will facilitate building blocks and roadmap by each country. This paper has been prepared on the request from India’s Presidency and combined IMF’s note (released in February) and FSB’s high level recommendations (released in July).

Call for comprehensive policy

The paper highlighted that blanket ban that make all crypto-asset activities (e.g., trading and mining) illegal can be costly and technically demanding to enforce. They also tend to increase the incentives for circumvention due to the inherent borderless nature of crypto- assets, resulting in potentially heightened financial integrity risks, and can also create inefficiencies, the paper said.

Talking about comprehensive policy and regulatory response, the paper said: “Regulation and supervision of licensed or registered crypto-asset issuers and service providers can support the functioning of capital flow measures, fiscal and tax policies, and financial integrity requirements.” For example, licensed, regulated and supervised crypto-asset service providers and appropriate reporting requirements can reduce data gaps, which are particularly important for capital flow measures that rely on monitoring of cross-border transactions and capital flows.

The paper noted that 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. “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,” the paper said.

Targeted measures

To address risks to financial integrity and mitigate criminal and terrorist misuse of the crypto-assets sector, the paper said that 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). “Jurisdictions should identify and assess the money laundering and terrorist financing (ML/TF) risks associated with VAs and take appropriate steps to manage and mitigate those risks,” it said.

The paper has also called for additional steps to be taken up by some jurisdictions, in particular emerging economies to address specific risks. These jurisdictions may want to adapt these targeted measures to their country-specific circumstances, especially if they face elevated macro-financial risks from crypto-assets. Jurisdictional characteristics that may determine vulnerabilities to macro-financial risks of crypto-assets include size of the economy and financial system, regulatory priorities, institutional quality and capacity, and level of financial integration into the global economy. “The implementation of these measures may vary across countries based on their unique circumstances and capacity constraints,” the paper said.

Crypto-assets have been in existence for more than a decade and have displayed significant volatility. Emerging in January 2009, shortly after the Global Financial Crisis, the value of crypto-assets has fluctuated dramatically with many episodes of sharp appreciation and subsequent steep price reversions. For example, in 2021, the total market value of crypto-assets grew 3.5 fold, and in the crypto-asset market turmoil that started in May 2022, the total market value shrank from a peak of $2.6 trillion to below $1 trillion