At the G20 finance ministers’ meetings in India, IMF Managing Director Kristalina Georgieva stated that the United Nations financial agency would prefer to differentiate and regulate crypto assets rather than enforce an outright ban.
Konstantin Shulga, CEO and co-founder of Finery Markets, provides his analysis on the comments made at the G20 event.
Q4 2022 hedge fund letters, conferences and more
Classifying Digital Money
Q. Georgieva has stated that there “is still confusion around how to classify digital money”. What potential solutions could help solve this?
“Digital money is emerging as a new fundamental force in the financial system, offering the potential for greater efficiency, innovation and financial inclusion.
“As more and more institutions, countries and citizens embrace the potential of cryptocurrency, digital money, stablecoins, and central bank digital currency, the complexity of this new environment has become evident.
“It presents tough challenges for policymakers to create a consistent and coordinated set of global policy frameworks to ensure the safety of this new financial system.
“In particular, governments have to reconcile the bi-monetary approach, where countries have both domestic currencies and international ones, while navigating intricate developments such as monetary policy, legal status (currency, commodities, securities) of digital money and related tax rules, and oversight requirements for market participants.
“The IMF, FSB and BIS are playing a key role in guiding the development of these global financial standards, although a full implementation is still years away.
“With the adoption of digital money here to stay, it is important that regulations keep pace with the changing times to ensure strong protections and growth of the global economy.”
Issue Of Legal Tender
Q. What are your thoughts on Georgieva referring to a paper which states crypto assets cannot be legal tender as they are not backed?
“Cryptocurrencies have the potential to revolutionize the global economy by offering exciting benefits such as faster, more secure, and lower-cost transactions and payments. They could also be a way for individuals to invest in a new asset class.
“Although few countries like Salvador or CAR are experimenting with Bitcoin as a legal tender, most countries do not accept cryptocurrencies as legal tender, as highlighted by Georgieva.
“This may be viewed as a risk to the existing financial system by financial authorities, so the risks, benefits, and implications of cryptocurrencies should be carefully weighed before they are officially made legal tender.
“This includes considerations such as how these digital currencies may affect existing economic and financial systems, how tax laws could be applied, and how illegal activity could be combated.
“Governments should also be mindful of the implications of decentralizing currency issuance, as it could present an obstacle to monetary policy and governments’ powers over their economies.”
Crypto Regulation
Q. According to Georgieva, an inability to protect consumers from the rapidly evolving world of crypto assets would be the primary catalyst to ban crypto. How can this be avoided? And how can consumers be protected?
“The best way to ensure consumer protection in the crypto space is to create robust regulations that are focused on protecting the rights and interests of customers.
“Banning cryptocurrencies, however, would be an ill-advised decision for financial authorities. Such a ban would limit the potential for legitimate uses of the technology, such as financial inclusion, cheap remittances, fast payments, and secure storage of wealth and value transfer.
“Additionally, enforcing a ban would be difficult, since the technology is designed to exist on a decentralised, distributed ledger rather than in a central location. This would make implementing a ban an expensive endeavour for authorities, while also creating regulatory arbitrage and an unlevel playing field for businesses wishing to innovate in fintech.
“Finally, a ban would further isolate the country from the global economy, resulting in a reduction of investment and trade opportunities. The industry would expect the regulators to establish clear definitions of different types of digital assets/digital money and the associated risks.
“In order to provide consumer protections, clear regulations should also create distinct licensing requirements for crypto infrastructure, such as exchanges, custodians, and wallet providers, and set standards for the storage and transfer of customer funds, including KYC/AML requirements and secure storage solutions.”
