Why Developing Economies may Face Amplified Macro-Financial Risks from Crypto-Assets The IMF-FSB synthesis paper on overall crypto asset regulation, that will be taken up at G-20 summit, says the macro-financial risks presented by crypto-assets are likely to be larger for Emerging Markets and Developing economies (EMDEs).
By Priya Kapoor •
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A synthesis paper prepared by the International Monetary Fund (IMF) and Financial Stability Board (FSB) on overall crypto asset regulation, that will be taken up by the leaders at the G-20 summit, says the macro-financial risks presented by crypto-assets are likely to be larger for Emerging Markets and Developing economies (EMDEs). It has cited five reasons for that.
First, EMDEs have, on average, weaker monetary frameworks, higher inflation rates, and more unstable currencies. This reduces the ability of EMDEs' currencies to perform the main roles of money - store of value, medium of exchange, and unit of account - incentivising currency substitution, potentially towards crypto-assets.
Second, the share of the population that is unbanked is larger in most EMDEs. Third, financial education is generally lower there and so is individuals' understanding of the potential risks of crypto-assets.
Fourth, cross-border transaction costs are typically larger for EMDEs. This means that crypto-assets have the potential to lower cross-border transaction costs for these countries, potentially leading to relatively larger gross balance of payment flows, and to higher valuation volatility.
Fifth, relative to Advanced Economies (AEs), emerging markets typically have in place a larger number of Capital flows and capital flow management measures (CFMs), which creates added incentives for crypto-asset adoption to achieve circumvention.
'Blanket ban can be costly'
However, the 53-page paper made a case against blanket bans that make all crypto-asset activities (e.g., trading and mining) illegal, citing the reason that it can be costly and technically demanding to enforce.
"Bans in one jurisdiction could also lead to activity migrating to other jurisdictions, creating spillover risks. A decision to ban is not an "easy option" and should be informed by an assessment of money laundering and terrorist financing (ML/TF) risks and other considerations, such as large capital outflows and other public policy aims," reads the paper.
It also said that targeted restrictions could be justified to manage specific risks for resource-constrained authorities or to support regulatory frameworks. "Targeted restrictions might be warranted in the short run while countries increase internal capacity (including knowledge and awareness) in anticipation of regulation," reads the paper.
Besides this, the paper also calls for adopting unambiguous tax treatment of crypto assets and a policy framework to guard against excessive capital flow volatility.
Commenting on the developments, Sumit Gupta, co-founder, CoinDCX said, "Web3 technologies including crypto offer several revolutionary benefits. But given their disruptive nature, they may pose certain challenges. Policies need to optimize the potential of Web3, while mitigating its risk. We salute the efforts of the G20 nations led by India in their endeavor to support balanced regulation."
The call for a global regulatory framework for crypto assets has been gaining ground for some time. At the recent B-20 summit, Prime Minister Narendra Modi made a strong pitch for it that would address the concerns of all stakeholders. According to Richard Teng, Head of Regional Markets, Binance, India's presidency presents an opportunity for the nation to play an active role in shaping international regulations that can protect the interests of all stakeholders involved in the cryptocurrency industry and to build a sustainable and inclusive cryptocurrency ecosystem.
"India showcases a balanced approach by combining its tech-savviness with advocacy for a global cryptocurrency framework. This sets the stage for future success by fostering innovation, nurturing local expertise, and advocating responsible adoption," said Teng.
