Macro Insights Weekly: Crypto update; China power crunch; RBI policy preview
- Country regulators and multilateral institutions are taking a hard look at cryptocurrencies
- Operational, governance, and risk practices are under scrutiny
- Expect new layers of consumer protection
- In China, substantial policy support is needed to avert a significant deterioration of the outlook
- In India, RBI is getting ready to gradually exit from its emergency monetary policy setting
A late-September rebound saw cryptocurrencies reach a total market value of USD2.2trln, a ten-fold increase since the beginning of last year. This is a remarkable outcome given the plethora of restrictions related to usage and mining imposed by China and India during the same period. The launch of a number of digital asset exchanges, rollout of innovative wallets, changes in mining technology, and wide issuance of stablecoins have kept the momentum going for cryptocurrencies.
Country regulators and multilateral institutions are taking a hard look at this area, as the scale and scope of cryptocurrencies are now large enough to have systemic implications. Below we highlight some of the key concerns:
• Security and governance. Thousands of cryptocurrencies have come into existence in recent years, with no globally unified reporting structure to discern their operational, governance, and risk practices. Information on liquidity, safeguards, and stability of the underlying technology are unclear for many such currencies. There have been cases of hacking and disappearance of customer funds, with little recourse available in many cases, worrying the authorities.
• Consumer protection. If a cryptocurrency is characterised by limited disclosure and oversight, then what prevents developers from walking away, with no customer protection available? Compared to the multiple layers of protection available to customers of conventional financial assets, holders of cryptocurrencies have a fraction.
• Surveillance gap. Global and local regulators continue to struggle to track crypto transactions and identify the parties involved, owing to data gaps. There is mounting concern that these gaps are exploited by some users for illegal activities like money laundering, ransomware, and financing of terrorism. There is scant international collaboration in place to monitor cross-border crypto transactions, making the surveillance gap nearly impossible to fill at the current juncture.
• Monetary policy efficacy. It has become evident that in developing countries with weak monetary stability, the population may find the motivation to trade in cryptocurrencies, especially stablecoins. This can lead to problems like loss of capital controls, currency mismatch, a weakening of the monetary policy transmission mechanism, and tax avoidance. There is also concern about the ability of stablecoins to withstand high volatility.
Concerns are not only being expressed with respect of cryptocurrencies; there are also some risks associated with central bank digital currencies. Could they increase the intensity of bank runs? Could they undermine the traditional banking system-based transmission of monetary policy? Could they blur the line between fiscal and monetary policy? Such considerations will shape the brave new world of digital currencies in the coming years. At a minimum, the challenges ahead call for establishing global standards for reporting and forming the architecture of digital currencies.
Taimur Baig
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
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