Crypto Needs Comprehensive Policies to Protect Economies and Investors

The global push for clearer policies on crypto assets has gained momentum
under the Indian G20 Presidency. As this work continues, it’s important to
recognize the progress already achieved, but more is needed, especially in
implementing global standards.

Last year’s failures of the FTX crypto trading platform and the

Terra Luna stablecoin highlighted the urgency of establishing clear policies to
protect investors and prevent abuse. Despite recent industry challenges,
investor optimism continues to revive periodically, as evidenced by
Bitcoin’s near doubling this year. Without robust safeguards, the increased
risk of fraud and misconduct could adversely impact investors’ expected
returns.

While some policymakers have taken
necessary steps to safeguard consumers and ensure financial integrity, it is equally
important to consider the broader implications of crypto. Such assets,
particularly stablecoins denominated in hard currencies, could potentially
replace official currencies, and significantly impact countries’ monetary
and fiscal policies. This is especially true in emerging markets and
developing economies, underscoring the need for a comprehensive,
consistent, and coordinated policy approach to crypto.

That’s why we presented an assessment of the

macro implications of crypto assets to the G20 presidency earlier this year, building on
recommendations outlined in the

Elements of Effective Policies for Crypto Assets endorsed by the IMF Executive Board in February.

Our approach features three key pillars: a sound macro-policy foundation,
clear legal treatment and granular rules, and effective implementation.

These are our key policy recommendations:

• The defense against the substitution of sovereign currencies is the
  maintenance of robust, trusted, and credible domestic institutions.
  Transparent, consistent, and coherent monetary policy frameworks are
  crucial for an effective response to the challenges posed by crypto assets.
• To protect national sovereignty, it is important not to grant crypto assets
  official currency or legal tender status. Doing so would require accepting
  them in many jurisdictions for tax payments, fines, and debt settlements,
  and could generate fiscal risks for government finances, and could threaten
  financial stability or rapid inflation.
• To address the volatility of capital flows associated with crypto,
  policymakers should integrate them within existing regimes and rules that
  manage capital flows. This will help ensure stability and minimize
  potential disruptions.

Finally, tax policies should ensure unambiguous treatment of crypto assets,
and administrators should strengthen compliance efforts. Specific
regulations are needed to clarify the tax treatment of crypto, including
value-added taxes or levies on income or wealth.

Clear legal treatment

Building on a sound macro-policy foundation, clear legal treatment and
granular rules are crucial. The principle of “same activity, same risk,
same regulations” should guide regulatory efforts.

Consistent with the

recommendations by standard setters such as the

Basel Committee on Banking Supervision,

Financial Action Task Force,

Financial Stability Board, and the

International Organization of Securities Commissions, our recommendations are:

• A comprehensive legal foundation is essential to effectively regulate
  crypto, addressing both private law and financial law aspects. This
  includes ensuring predictability and enforceability of rights while
  appropriately classifying crypto.
• Strong anti-money laundering and combating the financing of terrorism
  (AML/CFT),

  prudential and

  conduct rules should be implemented to cover all entities and activities related to the
  issuance, trading, custody, or transfer of crypto.

• For systemic stablecoin arrangements, additional requirements such as
  the

  Principles for Financial Market Infrastructures—standards that aim to ensure the safety, efficiency, and resilience of
  FMIs—should be applied.

Significantly, the FSB in July established a set of high-level

recommendations for crypto regulation, focusing on financial stability. They include
ensuring authorities’ regulatory powers and sound governance and risk
management practices by providers. It also features revised high-level
recommendations for effectively addressing financial stability risks
associated with “global stablecoin” arrangements.

Overall, the recommendations promote the consistency and comprehensiveness
of regulatory, supervisory and oversight approaches to crypto.

Effective implementation

Finally, ensuring effective policies requires several measures including
strong coordination, at the domestic and international level:

• National authorities must align their frameworks to the emerging
  guidelines, and standards being developed by standard setting bodies. This
  alignment is critical to achieve consistent treatment of crypto assets and
  may require legislative changes.
• Developing strong supervisory capacity is vital for monitoring and
  enforcing rules effectively. Authorities must have the necessary skills and
  resources to oversee the evolving crypto asset landscape.
• Given the borderless nature of the crypto-assets ecosystem, international
  collaboration and information sharing are crucial. Cooperation among
  supervisors and competent authorities will enable the monitoring of crypto
  asset service providers and maintain the efficacy of regulatory policies.
• Going beyond crypto polices,public authorities should take
  advantage in the progress in digital technology to enhance public policy
  objectives and must actively collaborate to address ongoing cost, trust,
  and speed issues, particularly for cross-border payments. New multilateral
  platforms could

  improve

  the efficiency of transactions.

The IMF will continue to support the G20 by delivering to the Leaders’
Summit in September a joint IMF-FSB synthesis paper highlighting the
building blocks for effective crypto policies. In addition, we are
committed to providing tailored capacity building to our 190 members based
on the above recommendations and emerging guidelines from standard setters.
Our surveillance program will also assess the effectiveness of policy
frameworks including crypto.

By embracing a comprehensive approach and implementing these
recommendations, policymakers can safeguard monetary sovereignty, protect
investor interests, and promote financial stability in the digital age.