As the cryptocurrency market continues to evolve, a middle-of-the-road regulatory consensus is gaining momentum that aims to strike a balance between skepticism and optimism around crypto, said Aaron Brown, former managing director and head of financial markets research at AQR Capital Management, in a recent article for Bloomberg.
Four senior International Monetary Fund (IMF) officials recently outlined their vision for international crypto regulation in an IMF blog.
Earlier, the G20 members had received support from the IMF and the United States for coordination on global crypto regulations.
The executive proposed four major theories, while one theory was praised, two were criticized, and another was considered problematic.
Embrace competition and strengthen institutions
Aron highlighted that one of the proposals that has received support from IMF officials is the idea of hedging against the replacement of sovereign currencies by increasing domestic institutions.
Raising such institutions encourages traditional financial players to step up their game and improve their offerings, rather than seeking regulatory intervention to stifle crypto competitors.
This view acknowledges that the advent of cryptocurrencies was due to mistrust of the traditional financial system during the 2008 financial crisis.
By fostering confidence in sovereign debt, central bank competence and adherence to the rule of law, the traditional financial sector can regain lost ground.
However, a controversial principle put forth by IMF officials is to avoid granting legal tender status to cryptocurrencies, which some countries have already done.
Critics argue that the move is not intended to protect national sovereignty, as has been claimed, but rather to protect government revenue from seigneuries – the profits governments generate from issuing money.
By withholding official status of cryptocurrencies, governments seek to maintain their monopoly on wealth creation, as the growing popularity of cryptos poses a threat to traditional revenue streams.
Another controversial proposal by IMF officials involves integrating cryptocurrencies into existing systems that manage capital flows.
However, critics view such measures as tantamount to financial repression, which limits the free movement of capital across borders.
Management of capital flows can be detrimental to the benefits of seamless cross-border transactions of crypto.
Instead of resorting to such financial sanctions, crypto proponents argue that embracing the innovative potential of digital assets can lead to more beneficial outcomes for both the economy and global trade.
Attempt to define and implement tax policies
The last proposal that drew criticism revolves around imposing stricter tax policies on cryptocurrencies to ensure fair dealing and compliance.
Critics say that attempts to predetermine tax treatment for each crypto project could hinder innovation and these projects’ unique and complex ways of operating.
Instead, a more creative approach would be for regulators to collaboratively explore ways to harness the potential of the crypto ecosystem to extract government revenue without stifling growth.
Optimism about crypto regulation
Aron further added that despite the differing outlooks, there is growing optimism about the future of crypto regulation.
Although the challenges are clear, ongoing communication and dialogue between innovators and regulators is contributing to a more collaborative environment.
While no definitive regulatory model has yet emerged, stakeholders are more open to unconventional approaches to find a common ground that benefits both the crypto industry and traditional financial systems.
In the United States, a group of House Republicans introduced a long-awaited bill last week.
If passed, the crypto oversight roles of the Commodity Futures Trading Commission and the Securities and Exchange Commission would become more pronounced in the North American country.