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.

    G20 Data Gaps Initiative

    • About:
      • At the G20 Leaders’ Summit in Bali, India affirmed that “data for development” will be integral to its G20 presidency. 
      • The Data Gaps Initiative will build on the close collaboration among the participating economies and international organizations.
    • Data gaps & significance of initiative:
      • Many countries face information gaps that impede their ability to fully grasp the impact of policies. 
      • And without comprehensive and internationally comparable data to monitor progress, it is difficult to know what works, and where corrections are needed. 
      • All this makes the full availability of fiscal data across all levels of government a public good.

    Source: TH