Key G20 policy paper calls for licensing of crypto services, money laundering standards on sector

New Delhi will seek consensus on the policy paper’s recommendations of world leaders who will be in India later this week for the final leg of the G20 Summit. The G20 nations are expected to discuss the policy paper which was earlier also discussed at the meeting of finance deputies in New Delhi on September 5-6 ahead of the Leaders’ Summit.

Alarming the potential impact that crypto-assets could have on the financial stability of nations, the paper said 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,” it added.

To address macroeconomic risks, the paper has recommended that jurisdictions should “safeguard monetary sovereignty and strengthen monetary policy frameworks, guard against excessive capital flow volatility and adopt unambiguous tax treatment of crypto-assets”.

“To address risks to financial integrity and mitigate criminal and terrorist misuse of the crypto-assets sector, 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),” it added.

However, the paper has recommended against an outright ban on crypto-assets, saying it could have a “spillover” effect in other jurisdictions.

“Blanket bans 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.

“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,” it added.

But that doesn’t mean all prohibitions should be off the table. “Some jurisdictions, in particular emerging markets and developing economies (EMDEs), may want to take additional targeted measures that go beyond the global regulatory baseline to address specific risks,” it said.

Crypto-asset service providers should be licensed or registered and comply with all applicable requirements, the policy paper recommended.

“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,” it said. “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 IMF-FSB roadmap addressed another concern of G20 countries about the proliferation of stablecoins – which are pegged to the value of fiat money – threatening currency replacement or bank runs in emerging economies. “Rapid capital flight (or reversals) could materialise if foreign currency-denominated stablecoins became easier and cheaper to hold in large quantities relative to foreign currency bank accounts,” the paper said.

It added that global stablecoins adopted by multiple jurisdictions “may transmit volatility more abruptly than other crypto-assets and may cause significant risk to financial stability.”