By Ussal Sahbaz
The so-called “crypto-assets” have been under the focus of the regulators of the G20 economies recently. This piece will argue that G20 has both an opportunity and responsibility to coordinate these efforts to make sure that the building blocks of the next generation of decentralised finance (DeFi) and internet is conducive to a sustainable, balanced, and inclusive global economic architecture.
G20’s first mention of the cryto-assets was in the Buenos Aires Summit in 2018 and the focus was on anti-money laundering efforts: “We will regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF [Financial Action Task Force] standards and we will consider other responses as needed.” In the Osaka Summit in 2019, the G20 leaders said, “While crypto-assets do not pose a threat to global financial stability at this point, we are closely monitoring developments and remain vigilant to existing and emerging risks” and asked the Financial Stability Board (FSB) to monitor the potential financial stability risks, which resulted in FSB’s 2018 report on the global stablecoins.
In Riyadh last year, partly as a response to Facebook’s declaration to issue a global stablecoin named Libra, the G20 leaders gave a sharp reaction: “No so-called ‘global stablecoins’ should commence operation until all relevant legal, regulatory and oversight requirements are adequately addressed through appropriate design and by adhering to applicable standards.” Facebook since then backstepped from Libra, which was supposed to be registered in Switzerland and backed by a basket of global reserve currencies, and rebranded its efforts as Diem, now a stablecoin only backed by US Dollars. Diem is yet to be issued. During the same cycle of Saudi’s G20 Presidency, FSB published a roadmap for enhancing cross-border payments, an area in which global stablecoins like Libra would have replaced the existing inefficient methods. The fate of Libra shows that if the G20 can act decisively, rebel private sector solutions can be put under control of sovereign states and public-private sector coordination can be enhanced in building the blocks of the next generation financial architecture.
Nevertheless, according to the recent International Monetary Fund (IMF) Global Economic Outlook, stablecoins have a market capitalisation of US $120 billion and represent only around 5 percent of the global market capitalisation of crypto-assets. Nearly half of this volume is Bitcoin and the rest is other coins including Ether, on which a large smart contract ecosystem is being formed. Bitcoin itself does not have a utility value; it is regarded by investors as “digital gold”—an accessible and liquid asset to store value and hedge against rising inflation. Not surprisingly, Bitcoin is especially popular in emerging market and developing economies, including G20 economies such as Turkey, Brazil, Argentina, and Indonesia. Given historic macroeconomic instability and inflationary risks, some of these countries face a risk of what the IMF calls “cryptoisation,” i.e., resident capital in the form of crypto-assets.
Reactions to crypto-assets from countries vary quite a lot: China imposed a comprehensive ban on all crypto-assets in 2021. The main potential purpose is to promote China’s central bank digital currency—an area in which China is a global leader. Indian regulators imposed similar bans before, but failed at the courts. If the internet is not as closely monitored as it is in China, it is also technically impossible to impose a ban on exchange of crypto-assets, because most of the exchange takes place in global entities, which are always reachable through virtual private networks (VPNs). Some G20 economies, like Turkey, imposed partial regulations and most are discussing comprehensive crypto-asset regulations. The most advanced draft is MiCa, published by the EU and now under discussion for more than a year. In the meanwhile, El Salvador, a small and already officially dollarised country, declared Bitcoin as a legal national tender.
Regulation of crypto-assets, in particular Bitcoin, the largest one by market cap, requires global coordination. The reason is simple and technical. While the owners of Bitcoin are local users, the blockchain ledger on which it runs is global. Any transaction requires amendment of all ledgers globally. Hence, unlike gold or securities, there is no local custody or local exchange of Bitcoin. This is why no open economy itself can regulate Bitcoin or other crypto-assets. This incapability leads either to fear and rules that would completely ban exchange of crypto-assets, which, in turn, will be futile because of the very reason that the assets are global in nature. Alternatively, it results in a complete lack of regulation, which is not only a risk for ordinary users and a lack of guidance for institutional investors, but also creates global money laundering and terrorism financing issues.
G20 should have a full grasp of regulation of crypto-assets, providing guidance to national regulators on the nature of the technology and regulatory best practices. It should task OECD, in cooperation with the FSB, the FATF, and the IMF, to prepare guidelines for the regulation of crypto-assets. The first generation of the internet economy was shaped around big tech companies without an emphasis on sustainability and inclusivity. The second generation of the internet economy will be shaped around crypto-economy. While it is right that the crypto-assets do not at the moment pose a risk to global financial stability, it is G20’s imperative to act as a leader in shaping the regulatory architecture of the future internet economy.
The views expressed above belong to the author(s).