Cryptocurrency, yet again in focus

Debate to bring it under the ambit of regulations in G20 summit infuses new life to crypto markets
[Representational Image]
[Representational Image] Pixabay [Creative Commons]

At a time when the world is talking about visible footprints of recession hitting developed as well as emerging economies and ‘out of control’ inflation giving sleepless nights to rich as well as poor, cryptocurrencies are emerging as hot subjects of discussion on a positive note.

It’s none other than the union finance minister, Nirmala Sitharaman, who has been lending support to the debate regarding legal status of cryptocurrencies in the country.

Just a few days back, World Economic Forum (WEF), quoting two-thirds of private and public sector chief economists, anticipate a global recession this year, with roughly 18% considering it to be ‘extremely likely’.

The globally known economic experts believe a global slowdown seems to be on the horizon. Notably, recessionary sentiment has resulted in a slowdown of most economic factors, including investment activity.

Even as the Reserve Bank of India (RBI) has been holding a stance against any legal status to cryptocurrency, the government’s disclosure that ‘the issue of regulating crypto assets will be taken up at G20 meetings’ is nothing but a hint at granting it a legal status in near future.

A point to be noted is that in June 2022, the RBI in its financial stability report revealed that cryptocurrencies are a clear danger. “Anything that derives value based on make-believe, without any underlying, is just speculation under a sophisticated name.”

Now, the finance minister recently said: “Crypto is heavily tech led and has less human intervention. We are talking to all nations that if regulation has to be framed then one country cannot frame it alone.

So we are speaking to all for forming a Standard Operating Procedure (SOP) so that it is effective. So all these are part of discussion. The process of discussion is on in the G20.”

The Group of Twenty (G20) is the premier forum for international economic cooperation. It plays an important role in shaping and strengthening global architecture and governance on all major international economic issues. 

It was founded in 1999 after the Asian financial crisis as a forum for the Finance Ministers and Central Bank Governors to discuss global economic and financial issues. 

It’s worth mentioning that the Group members represent around 85% of the global GDP, over 75% of the global trade, and about two-thirds of the world population.

Remarkably, India has assumed the G20 presidency for the 2023 summit, which is scheduled to take place in Pragati Maidan, New Delhi in September this year.

Meanwhile, the support of the Finance minister to discuss the issue of regulating the cryptocurrency markets also comes at a time when the world of financial markets is still shaking like jelly after the recent collapse of crypto exchange FTX and the ensuing sell-off in crypto markets.

The spotlight on the vulnerabilities in the crypto ecosystem is yet to fade out. Now seeking consensus on regulating cryptocurrencies at G20 amid the susceptibilities is a challenging task for the Group.

Last month, in a rare joint statement by the US Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), expressed their concerns about the risk that cryptocurrencies can bring to the banking system.

The price mechanism of these virtual assets is extremely volatile in nature and a survey has found its total valuation swinging from almost USD 3 trillion in November 2021 to less than USD 1 trillion in January 2023. This situation vetted the fragile backing and governance problems in the uncharted field of crypto markets across the globe.

Precisely, a look at the performance of the crypto markets reveals the turbulent times which the cryptocurrency markets faced in the year 2022.

The government’s flat 30 per cent tax and an additional 1 per cent tax deducted at source (TDS) on the transfer of crypto tokens caused disturbance in the market and its transactions witnessed notable slowdown. Not only this, the Central Bank Digital Currency (CBDC) launched by the RBI during the period is not at all good news for the use of cryptocurrencies.

Why is the RBI against the use of cryptocurrency in the country’s financial system? By virtue of the nature of cryptocurrencies, they are not controlled by a country’s regulators or even governed by them.

Being operational in an unregulated environment, there is huge scope that criminal elements may be using these virtual currencies for money laundering activities. So, this makes a sense for the RBI to be suspicious of cryptocurrencies. Notably, banks in line with RBI guidelines have banned crypto transactions through their system.

In the event of a government intervention through tough regulatory measures (which may include blanket ban on these digital currencies as medium of exchange), there is a possibility that investors may lose their entire investment.

Experts say the recent Chinese regulator’s action may not be the last one on cryptocurrencies across the globe. Governments and regulators worldwide are watching closely. They believe that there could be more regulatory intervention coming in major markets and tightening regulations can spook the market at any time.

Let me quote the chief economist of the CARE rating agency. He says: “Be it as a medium of exchange, mode of investment/ assets, cryptocurrency dealings should be banned in India and should be made as a criminal offense.”

So what is there in store for crypto markets in 2023? If the recession is on the horizon, it means the investment in cryptocurrency will get impacted in its value. According to Worldcoin, a global crypto community, some economists have predicted what a recession might mean for digital tokens. They believe that the value of risky assets such as crypto may depreciate.

It’s also feared that layoffs may increase at crypto companies, as seen during the crypto selloff in 2022, when many centralised crypto exchanges (CEXs) such as Coinbase, Gemini, and showed exit doors to many of their employees.

It will also be interesting to see how countries collaborate with each other in handling the classification of these virtual currencies, protecting the interest of investors, and placing a mechanism in place to foster a robust environment for bringing cryptocurrencies on the track of growth.

Meanwhile, it would be interesting to see what comes out of the G20 discussion on regulating cryptocurrency. If the G 20 nations concede to bring this virtual currency under the ambit of regulations, it would be one of the toughest tasks for the central banks to frame the regulatory guidelines for such markets. More particularly, it would be interesting to watch the response of the RBI once the government decides to regulate cryptocurrencies in the country.

(The views are of the author & not the institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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