Decrypt: India must leverage G20 leadership to evolve crypto framework

CHENNAI: As we head into the final leg of the G20 deliberations, I reiterate that we as a nation should now press for a leadership position vis-à-vis the stand on cryptocurrencies. However, a word of caution as we need to embrace the basic principles that history has taught us over the years.

Spanish-American philosopher George Santayana once said “Those who cannot remember the past are condemned to repeat it.” This so resonates with the crypto verse and the policy discussions that are taking place globally, and to apply these lessons to the oversight of crypto markets. This is the first principle to follow.

The second is robust risk management and good governance standards lower the likelihood of bank collapses. What happens when businesses don’t achieve these conditions was demonstrated by the collapse of FTX. All crypto-asset service providers (CASPs) should be required under the regulatory framework to have solid governance and risk management procedures in place, including legally obligatory external auditing and financial transparency obligations.

The third: past successes may not necessarily translate into future success. The most recent bank collapses and financial market turbulence seem to prove that we are destined to see similar failures in the future; yet, these turbulences occasionally exposed flaws that need to be fixed.

These guiding principles offer a framework for examining the current state of affairs and ongoing attempts to regulate cryptoassets, such as the implementation of BCBS (Basel Committee on Banking Supervision) standards and the Markets in Crypto-Asset Regulation (MiCA), and for determining how to make these initiatives even more effective. Fortunately, we have already made significant work in creating crypto legislation in recent years. The BCBS’s decision to establish guidelines for the prudential treatment of exposures to crypto-assets last December marked a significant turning point. The BCBS standard attempts to strike a compromise between responsible private sector innovation and solid bank risk management and financial stability. It offers a harmonised international regulatory and supervisory approach to banks’ crypto exposures.

We now need to push forward and here are some of my suggestions:

As we collaborate to develop regulatory standards, regulators and businesses must work together to comprehend the other side’s perspective. Stringent risk mitigation measures imposed on crypto exchanges and trading platforms may push companies to transfer to a less regulated area. Inconsistencies develop when governments around the world handle cryptocurrencies differently, utilising different definitions and focusing on distinct policy objectives.

The distinctions between various forms of crypto assets and their legal status remain hazy and uncertain. Today’s securities rules were enacted long before digital currencies were invented. Early stage advancements in financial technology, such as crypto assets, are less developed and resilient, allowing users to circumvent or evade internal restrictions. Furthermore, crypto exchanges can operate as marketplaces, brokers, custodians, and even proprietary asset holders. This can lead to increased risks of conflict of interest, which are difficult to police. In comparison to stock and commodities exchanges, third-party instruments for trading or account surveillance are less available.

Such regulatory deficiencies contribute to the persistence of challenges to market integrity and investor safety in bitcoin marketplaces. Major exchanges that trade traditional assets, such as stocks, are heavily regulated. The majority of cryptocurrency exchanges are not, and investors have no way of knowing if the trading volume and prices they post reflect real activity or market manipulation. Regulators are running on a treadmill here.