By Arun Kumar Shrivastav
The first meeting of the G20 Finance Minister and Central Bank Governors under India’s presidency will take place from February 23 to 25 in Bengaluru. Among the range of important financial issues that will be discussed during the 3-day deliberations include a common approach to cryptocurrency regulations.
India with nearly 115 million crypto investors is among the countries that are yet to introduce a comprehensive set of laws to regulate activities in the cryptocurrency space. In contrast, the European Union in October 2022 approved a comprehensive legal framework called Markets in Crypto-Assets (MiCA) Regulation to administer business activities in this sector. MiCA provides clear definitions of anti-money laundering and terror financing activities and provides for suitable legal action. Although MiCA has yet not come into effect, it provides crypto businesses with a clear roadmap for compliance. A company registered in an EU nation can expand its operations into any of the 27 countries in this block. Given this, crypto companies are setting their businesses, particularly, the headquarters, in their preferred EU countries, with an eye on the future when they would like to foray into other European countries.
Meanwhile, the United States regulators have turned the heat on crypto companies in the past few weeks and are making big headlines. The Securities and Exchange Commission (SEC) has forced the crypto exchange Kraken to stop offering staking services to US investors, calling them unregistered securities. It also fined the exchange $30 million for the same violation although it did say it so explicitly. The term that they used is the settlement, where the regulator and the company facing the charges go for a settlement rather than the long and tedious judicial process. The SEC also warned other crypto companies offering similar services without proper registration and licenses. It has left several big crypto companies including Coinbase in deep anxiety.
In another similar development, the New York Department of Financial Services (NYDFS) has asked blockchain technology company Paxos to stop minting BUSD, a stablecoin produced and operated under Binance’s license. BUSD is the third largest stablecoin with $16 billion in outstanding in a total $135 billion stablecoin market. NYDFS has taken the action against BUSD for not following the guideline that it released after the collapse of Terra stablecoin in early May last year that removed $40 billion of market cap from the cryptocurrency industry.
In particular, Paxos has been charged with not maintaining 1:1 cash reserves for the BUSD it released during a particular period last year. Separately, SEC has filed a lawsuit against Paxos for offering unregistered securities in the form of BUSD. These crackdowns by the US regulators have made many crypto companies and their promoters question the power and jurisdiction of the regulators, some accusing them of overreach.
The enforcement actions by the US regulators have come after several big crypto companies including Terraform Labs, FTX, Celsius, 3 Arrows, and Genesis went bust in less than a year. While investors have lost billions of dollars of their hard-earned and life-time savings, the crypto market lost nearly 2 trillion dollars in valuation.
Crypto companies use a technology that makes it impossible for regulators to spy or snoop on the transactions. Some of the crypto assets continue to hold ground despite all the collapses and bankruptcy in this space. For example, bitcoin and ether, the two most powerful products in the cryptocurrency world, are priced in the range of $25000 and $1600 respectively. For any asset to gain and maintain such valuations in today’s time is worth taking note of. In short, cryptocurrencies can’t be wished away. Banning them will not work. Like in any other field, it has got its share of good and bad guys. There should be laws to deal with the bad guys. That’s exactly what the cryptocurrency industry needs today.
The response of the Reserve Bank of India (RBI) to this issue so far has been something typical of the Indian bureaucracy. Instead of going after the rogue elements and charging them with the violations they have committed, the Indian regulators want to shut the doors on the entire cryptocurrency industry, which is technically not possible. In other words, they are trying to achieve something that’s beyond their capability.
That’s exactly where the problem lies. With the changes and advancements in technologies, watchdogs need to be suitably equipped with training and tools to deal with emerging challenges. Financial sector regulators all over the world need to improve their monitoring and enforcement infrastructure rather than shutting out new technologies.
In this background, the G20 meeting of finance ministers and central bank governors for the next three days will be interesting to follow. (IPA Service)