IMF’s action plan to treat crypto assets

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• Recently, the International Monetary Fund has laid out a nine-point action plan for countries to treat crypto assets.

More about the news

• Elements of Effective Policies for Crypto Assets:
  • IMF – The global lender of last resort  said its Executive Board had discussed a paper, “Elements of Effective Policies for Crypto Assets,” that provided “guidance to IMF member countries on key elements of an appropriate policy response to crypto assets.“
  • The paper sets forth a framework of nine elements to help members develop a comprehensive, consistent, and coordinated policy response. 
• The nine elements or policy actions are:
  • Safeguard monetary sovereignty and stability by strengthening monetary policy frameworks and do not grant crypto assets official currency or legal tender status.
  • Guard against excessive capital flow volatility and maintain effectiveness of capital flow management measures.
  • Analyze and disclose fiscal risks and adopt unambiguous tax treatment of crypto assets.
  • Establish legal certainty of crypto assets and address legal risks.
  • Develop and enforce prudential, conduct, and oversight requirements to all crypto market actors.
  • Establish a joint monitoring framework across different domestic agencies and authorities.
  • Establish international collaborative arrangements to enhance supervision and enforcement of crypto asset regulations.
  • Monitor the impact of crypto assets on the stability of the international monetary system.
  • Strengthen global cooperation to develop digital infrastructures and alternative solutions for cross-border payments and finance.
• G20 Data Gaps Initiative:
  • The IMF has welcomed in this context the new G20 Data Gaps Initiative.
  • According to the IMF, consistent recording of crypto assets in macroeconomic statistics across economies, underpinned by a reliable data framework, will be important.

Significance

• Such efforts have become a priority for authorities, the IMF said, after the collapse of a number of crypto exchanges and assets over the last couple of years.
• The paper addresses questions raised by IMF member countries on benefits and risks of crypto assets and on how to structure appropriate policy responses. 
• It operationalizes the principles outlined in the Bali Fintech Agenda (IMF and World Bank 2018) and includes macrofinancial considerations such as implications for monetary and fiscal policies.

More about Cryptocurrency

• About:
  • It is a digital currency that can be used in place of conventional money.
  • In cryptocurrencies, cryptography is used to secure and verify transactions. It is also used to control the supply of cryptocurrencies.
  • It is supported by a decentralized peer-to-peer network called the blockchain.
  • The first cryptocurrency: Bitcoin, was launched in 2009 by Satoshi Nakamoto.

• Features of Cryptocurrency:
  • Cheaper to transfer: 
    • Some coins are used to transfer value (measured in a currency like dollars) cheaper and faster than using credit or conventional means. 
    • Meaning the cost to send someone crypto, which can be converted into regular currency, is cheaper than something like a check or wire transfer.
  • No physical form: 
    • Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. 
    • However, it can be and many governments are working to create a crypto coin version of its respective fiat currency.
  • Decentralised: 
    • Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency. 
    • When created with decentralized control, each cryptocurrency works through what is called distributed ledger technology, which is typically a blockchain, that serves as a public financial transaction database.

• Challenges
  • While the supposed potential benefits from crypto assets have yet to materialize, significant risks have emerged. 
  • Undermining the monetary policy & international monetary system :
    • The widespread adoption of crypto assets could undermine the effectiveness of monetary policy, circumvent capital flow management measures, and exacerbate fiscal risks. 
    • Widespread adoption could also have significant implications for the international monetary system in the longer term.
  • Security Risks: 
    • Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
    • They are prone to issues like Hijacking, Routing Attacks, Distributed Denial of Service (DDoS) attacks.
  • Shield to Crime: 
    • Used for illicit trading, criminal activities and organised crimes. 
  • Lack of Liquidity and Lower Acceptability: 
    • Outside the traditional banking systems.
  • Price Volatility: 
    • Prone to price fluctuations and waste of computing power.
  • Threat to the Indian rupee: 
    • If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand of the latter will fall.
  • Consumer protection and enforcement: 
    • Due to the decentralised nature of digital instruments of bitcoins, any regulatory regime over crypto assets is challenging.
    • There is a great likelihood of execution of unauthorised trades not in consonance with any regulatory framework.

Indian Government’s stand on Cryptocurrency

• The Reserve Bank of India (RBI), has long recommended a complete ban on all crypto, warning that it has the potential to destabilize the country’s monetary and fiscal stability.
• Despite having no regulatory framework for crypto, the Indian government had introduced a new tax regime in 2022, taxing crypto income at 30% and a 1% tax deducted at source (TDS) on crypto transactions.

Way ahead

• The right regulations could be introduced to aid the growth of the industry.
• The other option would be to follow the nine-point action plan banning and wait for more clarity.

Source: TH