India's G-20 Presidency: Shaping the Future of Crypto Regulations

The article discusses India's role as the G-20 president in shaping the future of global crypto regulations, including its stance on CBDCs and the proposed framework by IMF and FSB.

Vish BR, strategy and operations lead

Introduction

India's presidency of the G-20 presents a unique opportunity for the country to shape global policy regarding cryptocurrencies. As the term begins in December, India is in a key position to guide discussions and decisions regarding the future of money as the developed world looks to establish a regulatory framework for the industry. However, the budget announcements last year were met with criticism from crypto companies operating in India, resulting in more than US$3.8 billion in trading volume being shifted from local to international exchanges between February and October 2022. 

India's Role in the G-20 Crypto-related Agenda

During its year-long G-20 presidency, India has the power to establish the crypto-related agenda for the intergovernmental forum, allowing it to facilitate dialogues and collaborations among various stakeholders as well as invited international institutions such as the United Nations, the International Monetary Fund (IMF), and the Financial Stability Board (FSB). These discussions have been included in the G-20's Finance Track as part of the working group named "Financial Sector Issues," which directly involves G-20 finance and central bank deputies, indicating the high priority given to crypto-related discussions compared to other working groups led by senior staff.

The Financial Stability Board's (FSB) comprehensive international rules have served as the global standard for crypto regulations which is based on the principle of "same activity, same risk, same regulation.", with its discussion papers facilitating multilateral discussions. However, India made a significant change by increasing the International Monetary Fund's (IMF) role in crypto negotiations during its G-20 presidency. During India's presidency, discussions will focus on contentious issues, such as risk assessments related to crypto assets. Indian Leadership has been urging the global regulatory community to build an internationally coordinated and comprehensive policy approach to crypto assets. MoS Finance Shri Pankaj Chaudhary also mentioned the same in a reply to a question in the Lok Sabha. Currently, two opinion camps have already emerged in these discussions one comprising emerging economies that are cautious about the proliferation of crypto assets due to concerns about dollarisation, and the other comprising developed economies that have capital controls and do not have an answer to this concern. Officials are optimistic about reaching a collective agreement on the matter by September, when India hosts the G-20 Summit in New Delhi, with guidance from the IMF.

The Reserve Bank of India and the Government's Stance on Crypto

The Reserve bank of India maintains its stance on the prohibition of cryptocurrencies, while the government, led by the finance ministry, advocates for the necessity of a global regulatory framework for the success of crypto. Both entities share concerns regarding the potential of crypto to create a parallel economy outside of government oversight, which they view as a systemic risk. In recent times, there has been a shift in attitudes towards crypto among those in power in India, with opposition politicians publicly criticising the government's heavy taxes on crypto. Privately, the government has voiced its discontent towards the crypto industry for failing to address the potential risks associated with the sector, including terrorism financing, during parliamentary finance committee meetings focused on safeguarding Indian investors. In summary, the position of those in power regarding crypto is influenced by their respective roles. 

Need for Clarification on India's Stance on Crypto

India has created an ambiguous situation regarding its stance on crypto, leading to a need for clarification. The Indian Finance Minister stated that the government does not wait for regulation to tax profits from crypto, despite not acknowledging its legality. As a result, the G-20 presidency is pressuring India to define its position on crypto. Two recent events have shed light on this issue. The first was a closed-door focus group meeting attended by officials from over ten emerging-market economies, who reached a consensus that crypto assets are risky and not worth investing in. This viewpoint is believed to align with that of the RBI. The IMF featured these observations in a discussion paper, potentially replacing the FSB's blueprint for the G-20 talks. The second event was a meeting at the National Institute of Public Finance and Policy (NIPFP), where policy think tanks and industry players came together to inform the government about the latest developments in crypto.

International Monetary Fund's (IMF) Guidance on Developing Policy Responses to Crypto Assets

On February 8, 2023, the Executive Board of the International Monetary Fund (IMF) discussed a board paper that focuses on providing guidance to IMF member countries on how to develop appropriate policy responses to crypto assets. The paper aligns with the IMF's goal to support economic and financial stability across its membership and operationalises the principles in the Bali Fintech Agenda, taking into account macro financial considerations such as implications for monetary and fiscal policies. Given the recent failures and collapses of various actors and assets within the crypto ecosystem, developing effective policies for crypto assets has become a high priority for authorities.

The paper proposes a framework of nine elements that can assist member countries in creating a comprehensive and coordinated policy response. These policy actions include protecting monetary sovereignty and stability, preventing excessive capital flow volatility, and establishing legal certainty of crypto assets. Other actions include developing and enforcing prudential, conduct, and oversight requirements for all crypto market participants, establishing a joint monitoring framework across various domestic agencies and authorities and monitoring the impact of crypto assets on the stability of the international monetary system. The paper also emphasizes the importance of strengthening global cooperation to develop digital infrastructures and alternative solutions for cross-border payments and finance. By implementing this framework, policymakers can mitigate the risks posed by crypto assets while harnessing their potential benefits.

India's Announcement on Global Cryptocurrency Regulations

Recently, India also announced that global cryptocurrency regulations will be based on a new synthesis paper jointly produced by the International Monetary Fund (IMF) and the Financial Stability Board (FSB). This announcement was made after the Group of 20 (G-20) meetings in Bangalore, which focused on creating a global regulatory framework for cryptocurrencies. The discussions held between the G-20 finance ministers and central bank governors aimed to establish a way forward for globally coordinated crypto rules. The synthesis paper will be submitted during India's G-20 presidency, which culminates in September and will be based on the FSB's expected paper in July. Indian Finance Minister Nirmala Sitharaman stated that they are going through a study process to ensure informed discussions. The views of all developing countries will also be included in any crypto policy framework, according to the World Bank. The shift in perception around crypto assets by G-20 nations in the past year, with the collapse of several major crypto companies, has led to a wide acceptance of the risks involved, according to India's Central Bank Governor Shaktikanta Das.

India's Central Bank Digital Currency (CBDC) Pilots

Last year, India initiated both wholesale and retail CBDC pilots, with the retail pilot intended for the private sector and citizens, while the wholesale pilot was limited to financial institutions. According to sources familiar with the matter, India aims to launch its retail CBDC nationwide by the end of 2023. Although several banks and cities are participating in the retail pilot, it will take a few more months to get a clear picture of the results. Meanwhile, India is facing two significant CBDC-related issues: how to ensure citizens' privacy, and how to justify the CBDC's public policy use when the country already has a successful digital payments system via its unified payments interface (UPI). A senior official familiar with India's CBDC pilots said that the digital rupee would complement the payments system, and the ongoing pilots would provide a better understanding of the best public use cases.

Conclusion

India can leverage its position to facilitate dialogue and collaboration among various stakeholders, including international institutions such as the United Nations, the International Monetary Fund (IMF), and the Financial Stability Board (FSB). While the Reserve Bank of India maintains its stance on the prohibition of cryptocurrencies, the government advocates for the necessity of a global regulatory framework for the success of crypto. India has created an ambiguous situation regarding its stance on crypto, leading to a need for clarification. However, the Executive Board of the International Monetary Fund (IMF) has recently discussed a board paper that proposes a framework of nine elements to assist member countries in creating a comprehensive and coordinated policy response. India has announced that global cryptocurrency regulations will be based on a new synthesis paper jointly produced by the IMF and the FSB. By implementing this framework, policymakers can mitigate the risks posed by crypto assets while harnessing their potential benefits. India is taking a leading role in developing a coordinated effort for crypto regulations across the world. The decisions taken under the ambit of its presidency hopefully would follow a balanced approach of not curbing innovation but also not compromising on the financial stability of a country. The move to empower the IMF for this role is likely to be able to influence countries from the global south to join the coordinated effort as without it the approach wouldn't be comprehensive. Overall, India's G-20 presidency provides an opportunity for the country to play a critical role in shaping the future of money.