Crypto adoption highest in India: Could undermine macro-financial stability, says IMF chief
Wide adoption of cryptocurrency can also result in circumvention of capital flow management measures
Despite repeated cautioning by agencies such as the Reserve Bank of India and nods of disapproval by the government, many people in India have been prompt in adopting cryptocurrency. On Thursday, December 14, the managing director of the International Monetary Fund (IMF) Kristalina Georgieva said the high adoption of crypto assets in nations such as India poses risks for macrofinancial stability.
She voiced her concern while speaking at an global conference on digital money in the South Korean capital of Seoul.
Georgieva remarked that crypto assets can undermine monetary policy transmission of changing interest rates. Wide adoption of cryptocurrency can also result in circumvention of capital flow management measures. According to the IMF boss, it could also impact fiscal sustainability if tax collection becomes volatile.
“Crypto asset adoption is high, especially in emerging market economies like India, Nigeria, and Vietnam, according to Chainalysis, though data is scarce. In Brazil, for every 100 reals spent on foreign securities, 25 go into crypto assets, according to ongoing research by IMF staff. The challenge is that high crypto asset adoption could undermine macrofinancial stability,” she said.
The countries ranked in the crypto adoption index are India, Nigeria, Vietnam, the US, Ukraine, the Philippines, Indonesia and Pakistan. The parameters used to create this ranking were total crypto trading activity, trading activity of non-professional users and peer-to-peer exchange trade volume.
Blockchain data analytics company Chainalysis published a report in October in which it ranked India on top of the world on crypto adoption. The parameters it employed for the ranking were transaction volume, purchasing power, and the population of countries to gauge grassroots level adoption of crypto assets. The report said, “India’s emergence as a top crypto market comes despite a regulatory and tax environment that can be challenging for the industry to navigate.”
During 2021 and 2022, Indian authorities and regulatory agencies have expressed their strong disapproval of crypto assets and have even said that money laundering rules could apply to crypto asset transactions.
In the last Union budget, the finance minister Nirmala Sitharaman announced a 30% tax on income from crypto assets and 1% TDS by crypto platforms.
“While every exchange operating in the country is required to collect TDS taxes from Indian users, many international exchanges aren’t doing so effectively, which may be drawing Indian users to them as opposed to exchanges focused primarily on India,” the Chainalysis report pointed out.
Though the IMF has been cautioning against the destabilising effect of crypto assets, it has also argued against a blanket ban and thinks that such a step would be difficult to enforce in this digital age.
Following detailed discussion with member countries, the IMF and the Financial Stability Board (FSB) brought out a paper last September. It contained steps for guidance on managing the crypto environment. This report detailed the stance of the IMF in this topic.
The IMF MD said that the objective of the multilateral agency is to help create make an efficient, interoperable, and accessible financial system by providing rules to avoid the risks of crypto and infrastructure by leveraging technology. “Among the main elements (of the IMF-FSB synthesis paper): do not make crypto assets legal tender or official currencies. Clarify and consistently apply laws, standards, and regulations, including those for anti-money laundering and financing terrorism. Establish clear tax rules. Provide a solid legal foundation with a clear classification of crypto assets. And coordinate policies globally to avoid regulatory arbitrage since crypto asset providers can relocate at the click of a button,” she added.
“These rules are not meant to return us to a pre-crypto world or to squash innovation. Not all crypto was tainted by fraud, just like the Wild West was not only about crooks, despite their legendary exploits,” Georgieva added.
The IMF chief said that several countries are implementing this guidance. They are drafting legislations and training supervisors to oversee the environment and enforce compliance.