Bretton Woods Committee | Thu, Feb 9, 2023
by Yaroslav Lissovolik
In 2022 the global financial markets were rattled by a series of adverse developments in the crypto segment, which culminated in the FTX meltdown and the multiple ripple effects the markets are likely to continue to grapple with in the course of this year. The implications of the crypto debacle, while clearly negative in the near term, also concern the longer-term trajectories of market development and regulation. But despite the severity of the blows to market confidence, the crypto crisis could be used by regulators as an opportunity to bolster international financial cooperation, including within the framework of the G20.
The problems that emerged from the FTX debacle reflect the broader fragilities and problems in the regulation of markets and the financial sector. The scale of the “crypto exposure” in the banking sector and the possible broader implications may be hard to gauge due to the weakness in supervision and regulation not only in the crypto segment itself, but in the broader financial market domain. In this respect the FTX saga is not just yet another crisis, but is also an important signal of the areas in financial sector supervision that need to be addressed.
Furthermore, notwithstanding the crisis the crypto industry will continue to develop across various geographies – whether in the emerging markets (EM) or developed markets (DM) space - and will likely be a source of financial innovation in the form of new products, services and technologies for the consumer sector of the global economy. In this context disregarding the role of crypto in the evolving architecture of financial markets could be fraught with a loss in competitiveness in the financial market sphere.
At the global level, rather than separating crypto from the rest of the world economy there could be a case for a more concerted incorporation of this segment into the mainstream regulatory processes. In particular, the IMF may need to explore the possibility of including the crypto segment into its regular Article IV consultation and FSAP assessments, with the latter also potentially including stress-tests performed with respect to the broader financial system. Effective regulation of the crypto sector may also prove important in gauging the scale and trends in the shadow economy – something that may be instrumental in fine-tuning the country’s macroeconomic policy mix.
Another potential area is the discussion of issues concerning the crypto sector at the global level in fora such as the G20. In 2023 India holds the chairmanship in the G20 forum and its Finance Minister Nirmala Sitharaman has already declared that the issue of the regulation of crypto assets is going to be one of the presidency’s priorities. G20’s work on the crypto market regulation is likely to be conducted mostly along the Finance Track, whose working groups such as the International Financial Architecture (IFA) could explore some of the possible pathways to cross-country coordination in this area.
It may also be worth involving the G20’s engagement groups such as the Business 20 (B20) to explore the potential ramifications of the development of crypto markets for the real sector of the global economy. The IMF could spearhead the coordination of discussions on the crypto market within the framework of the G20. In this respect, greater coordination of regulations and the harmonization of standards may also be conducted across regions and the Fund could include the crypto agenda into its regular coordination meetings with the Regional Financing Arrangements (RFAs).
Finally, there is an important aspect of “financial literacy” and “financial inclusion” that needs to be pursued not only in the context of the crypto market, but the broader financial system. Without due regulation in this area, the crypto world could pose substantial risks not only to market stability and transparency, but also the welfare of retail investors, most notably those that are only starting on the path of investing into crypto assets. This important agenda can be jointly undertaken by national regulators as well as the international organizations and for a such as the IMF, World Bank and the G20 (Global Partnership for Financial Inclusion). Rather than evading the difficulties encountered in developing crypto markets, regulators can use the alarm signals from recent adverse developments to improve the quality of national regulation and international financial cooperation.
Mr. Lissovolik is the founder of BRICS+ Analytics and a BWC member.