Country Regulations On Crypto Payments – The global reach of private digital currencies complicates national regulatory responses, but developing countries are left with no choice.
While these private digital currencies have rewarded and facilitated some remittances, they are a volatile financial instrument that can also carry risks and social costs.
Country Regulations On Crypto Payments
This episode of The Weekly Tradecast discusses the ups and downs of cryptocurrencies with debt and development finance economist Marina Zucker.
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Released three policy notes addressing these risks and costs, including the threats cryptocurrencies pose to financial stability, domestic resource mobilization and the security of monetary systems.
The policy paper, titled “All that glitters is not gold: The high cost of not regulating cryptocurrencies,” examines the reasons behind the rapid adoption of cryptocurrencies in developing countries, including facilitating remittances and protecting against currency and inflation risks.
Recent shocks in the digital currency market suggest that there are private risks involved in owning cryptocurrencies, but when the central bank moves to protect financial stability, the problem becomes public.
If cryptocurrencies become a widespread means of payment and even unofficially replace domestic currencies (this is called cryptography), this can threaten the financial sovereignty of countries.
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In developing countries, where demand for reserve currencies is insatiable, stablecoins pose a particular threat. For some of these reasons, the International Monetary Fund has expressed the opinion that cryptocurrencies pose a threat as legal tender.
The policy brief, entitled “Sovereign payment systems in the digital age: responding to the financial stability and security risks of cryptocurrencies”, focuses on the impact of cryptocurrencies on the stability and security of monetary systems and financial stability.
It is argued that a domestic digital payment system providing a public good could fulfill at least some of the reasons for using cryptocurrency and limit the spread of cryptocurrency in developing countries.
Depending on the countries’ capabilities and needs, financial institutions could offer a central bank digital currency or, more simply, a fast retail payment system. Given the threat of a widening digital divide in developing countries, this authority calls for continued issuance and distribution of cash.
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The policy paper titled “The Cost of Doing Too Little Too Late: How Cryptocurrencies Can Undermine Domestic Resource Mobilization in Developing Countries” discusses how cryptocurrencies have become a new channel to undermine domestic resource mobilization in developing countries.
While cryptocurrencies can facilitate remittances, they can also enable tax avoidance and evasion through illicit flows, just like in tax havens where ownership is not easily traced.
In this way, cryptocurrencies can also reduce the effectiveness of capital controls, a key tool for developing countries to maintain their political space and macroeconomic stability. Crypto-assets and the vast universe of related products and services have grown rapidly in recent years and are increasingly tied to the regulated financial system. Policymakers seem to be struggling with the risks inherent in a sector where most activities are unregulated or, at best, poorly regulated.
There are also concerns that uncoordinated regulatory measures could encourage potentially destabilizing capital flows. The IMF estimates the market capitalization of cryptocurrencies at $2.5 trillion. This may point to the significant economic value of fundamental technological innovations such as blockchain, although this may well reflect and froth in an environment of tight valuations.
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Crypto’s potential to transform the traditional financial system means that the challenges associated with it are drawing significant attention from regulators. The focus is twofold: the potential impact of cryptocurrencies on financial stability and the need to protect vulnerable customers.
A key challenge is the need for a coherent policy approach at the international level, including jurisdictional definitions and boundaries, as well as the prevention of exchange, market manipulation and systemic risks. There are credit and payment risks, banking, payments and anti-money laundering (AML) risks, tax policy and tax evasion risks, fraud and securities fraud, as well as cyber security, hacking and privacy risks.
But perhaps the most important question is this: in a system where so many new, previously non-financial actors play an important role in the provision of financial services, how do we, as financial managers, ensure that the financial system remains strong and that consumers remain? are you sure How can we ensure that we continue to have the right mandate and effective tools to ensure this outcome?
Adding to the ever-increasing regulatory challenges is the increase in public awareness, acceptance and use of cryptocurrencies. From a US perspective, a survey published in November 2021 by the nonpartisan Washington think tank Pew Research showed that 16 percent of respondents said they had invested in, traded, or otherwise used cryptocurrencies. Newsweek magazine cited a January 2022 survey by New York-based crypto firm Digital Investment Group that put the total number of Americans holding cryptocurrency at 46 million (about 14% of the population).
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In the UK, in June 2021 the UK Financial Conduct Authority released its fourth edition of Consumer Research on Cryptocurrency Ownership, which found increased public and media coverage against cryptocurrencies, with 78% of adults now having heard of cryptocurrencies. . About 2.3 million currently own the cryptocurrency, up from about 1.9 million in 2020.
The UK regulator also found that attitudes have changed as cryptocurrencies appear to have become more normalised, with fewer cryptocurrency users seeing them as gambling (38% compared to 47%) and more seeing them as an alternative or complement to their main investments. them. of crypto users who say they plan to invest more in the future.
In the European Union, as of February 2022, the total market capitalization of crypto-assets has increased eightfold over the past two years, to around €1.5 trillion today, although this is roughly €1 trillion less than in November. The peak years of 2021. It is assumed that cryptoassets have started to spread to the general public, with 6% of Slovaks and 8% of Dutch citizens reporting that they own cryptoassets.
This report is a follow-up to a special report published by Regulatory Intelligence in 2021, Cryptos on Rise. The report emphasizes that policymakers, regulators, and businesses must do their part to make cryptos as secure as possible. , not only in terms of investment risk, but also in terms of regulatory security and cyber resilience.
Cryptos On The Rise 2022
The 2022 special report goes beyond cryptocurrencies like bitcoin. Considering the need to develop a regulatory framework, it examines other cryptocurrency-related instruments, such as central bank digital currencies (CBDCs), non-fungible tokens (NFTs) and stablecoins, and highlights policy actions in key countries. It explores some of the misconceptions that persist about crypto, as well as the implications for financial stability and the future of money. It also examines the changing structural models of financial institutions emerging from the crypto world, represented by Decentralized Autonomous Organizations (DAOs).
As in the 2021 report, here is a summary of the tax, legal and regulatory status of cryptocurrencies in various jurisdictions.
There are some structural similarities between cryptocurrencies and digital central bank currencies, but CBDCs are best described as the digital equivalent of a country’s fiat currency. Therefore, they are often seen as an alternative or competition to cryptocurrencies. The most advanced CBDC to date is China’s digital yuan. During the Beijing 2022 Winter Olympics, athletes, coaches and media made digital payments via smartphone apps, payment cards or wristbands.
From the crypto-regulatory environment summarized in this report, it is evident that many of those who have moved to CBDCs are also taking restrictive positions or outright bans on other cryptocurrencies. The main examples are China, Russia, Iran and Venezuela.
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The G7 countries have been deliberately cautious about the potential of CBDCs, particularly with regard to retail CBDCs for use by the public. The G7 reiterated that the decision to launch a CBDC is up to each country and that no G7 jurisdiction has yet done so. In the 2021 Central Banks Survey, the Bank for International Settlements (BIS) found that 86% are actively exploring the potential of CBDCs, 60% are testing the technology and 14% are conducting pilot projects.
A CBDC would preserve the coexistence of sovereign and private money in the digital world. This is not an abstract benefit – it is the foundation of financial and monetary stability that ensures competition and efficiency in payment markets. But CBDC can create even more benefits for users. This can improve the privacy of digital payments. Private companies can monetize information contained in electronic transactions, which poses a threat to privacy. This risk is also increased by the fact that Big Techs have started to offer financial services and the rapid development of artificial intelligence. The purpose of the Data Protection Regulation is to prevent abuse, but it cannot always keep up with technological innovation, as we have seen in previous cases of data breaches and abuses by technology companies.
European Central Bank (ECB) board member at the CBDC debate at the US Monetary Policy Forum
A retail CBDC would be a digital form of central bank currency denominated in a national unit of account, distinct from electronic reserves (which cannot be accessed by individuals) and physical cash. As a direct obligation of the central bank, CBDCs would also differ from commercial bank money. If CBDC is issued, it could act as central bank money as