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October 20, 2023

Evaluation And Standerdized Approach for Adoption of Crypto Currency

Evaluation And Standerdized Approach for Adoption of Crypto Currency

The government will take a calibrated approach on cryptocurrency and is not going to rush ahead despite the recommendations of a synthesis paper prepared by the International Monetary Fund (IMF) and the Financial Stability Board (FSB) having been accepted by G20 finance ministers and Central bank governors in Marrakech last week

While the RBI had gone public with its concerns, the government is expected to task experts with assessing new recommendations on each of the parameters that would impact India and also suggest ways to tackle them. The synthesis paper, which was submitted ahead of the meeting of G20 leaders in last month had identified at least nine risks, ranging from financial and macro standards to monetary policy and use by criminals (see graphic below). It had for licensing and regulating crypto assets and reminded that countries adopt the FATF (Financial Action Task Force) norms to check money laundering and terror funding.

Officials said that the government wants to move in a way that the risks are covered, and a foolproof regime is in place as rushing in could have serious implications for the economy, based on the assessment by experts or panels that may be constituted, the government will take the next set of measures and will consult regulators such as RBI and SEBI.

For instance, when it comes to trading on the exchanges, the function of the custodian, depository and the exchange will have to be split, unlike in several jurisdictions where the exchange plays all the roles, creating risk of collapse. Besides, a political clearance will be required given that concerns over possible misuse have been flagged by PM Narendra Modi and Home Minister Amit shah.

In Marrakech, RBI governor Shaktikanta Das had cautioned against rushing in. “The fundamental question is whether governments and central banks are comfortable with private currency because currency is a sovereign function. Their financial consequences for domestic and global monetary and order, need to be understood. We need to understand all the risks before accepting them. We need to know how many sharks there are before entering the waters,” he said.


Monetary policy effectiveness may come under threat; can impact monetary stability if granted official currency or legal tender status Fiscal policy: Raises fiscal risks, govt. revenues  may be exposed to exchange-rate risk if granted currency status, public finances face higher risk Capital flows and capital flow management measures: Can hit capital flow management, make them volatile, and hurt domestic savings. Countries may find it harder to manage financial conditions and choose the exchange rate regime.   Global financial safety net (GFSN): Widespread adoption may require changes to central bank’s reserve holdings and GFSN, with potential instability during transition Payment system fragmentation: Large scale use of stablecoins risks increasing fragmentation of global payments. Legal: Grant of official currency status will raise significant macro-critical legal issues.  
Financial Integrity: Can be attractivetool for criminals, traceability is a challenge. Market Integrity: Prone to fraud, manipulation; non-compliance with or lack of regulation can impair market integrity, interests of market participants; can also raise competition issues. Environmental: Design elements of supporting distributed ledger network have key implications for energy consumption.

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