- Policymakers should act quickly to gather macroeconomic impact data to inform the design of regulatory frameworks and create standards that are custom-made for cryptocurrencies and stablecoins.
- Countries should collaborate to avoid regulatory arbitrage and promote a globally coordinated set of standards.
- Policymakers should also work with the business and technology communities to understand the possible economic impacts that certain regulatory models will create.
The emergence of crypto assets, such as cryptocurrencies, is seen by many as part of a broader trend toward more diverse financial market infrastructures that both enhance choice and offer new ways to meet current and future payment needs.
Recent regulatory advances, including the release of the Markets in Crypto-Assets (MiCA) provisional agreement in the EU and the release of the Framework for International Engagement on Digital Assets in the US, signal a desire to provide regulatory clarity in this space. In the future, the adoption of cryptocurrencies and stablecoins will most likely be correlated with the level and quality of regulation in a given jurisdiction. As regulatory certainty influences economic behaviour, large economic regions like the EU and the US are making strides to provide initial direction.
The World Economic Forum’s Digital Currency Governance Consortium (DCGC) has published research and analysis of the macroeconomic impacts of cryptocurrency and fiat-backed stablecoins. This work amplifies the need for timely and precautionary evaluation of the possible macroeconomic effects of cryptocurrencies and stablecoins and corresponding policy responses.
Macroeconomic criteria for cryptocurrency and stablecoins
The primary aim of financial regulation is to support financial stability, transparency, protection for consumers and investors and a level playing field for different market participants. Future regulation should support the criteria outlined in this paper and summarized in the table below:
A provisional agreement for 2022
At the end of June 2022, the Council presidency and the European Parliament reached a provisional agreement on the markets in crypto assets (MiCA) proposal which covers issuers of unbacked crypto assets, and stablecoins, as well as the trading venues and wallets where crypto assets are held. This regulatory framework is intended to protect investors and preserve financial stability while allowing innovation and fostering the attractiveness of the crypto asset sector. The purpose of MiCA is to provide more clarity across the European Union, as some member states already have varying national legislation for crypto assets, but there had been no specific regulatory framework at an EU level.
At a high level, the MiCA:
- addresses the fact that most crypto assets fall outside of the scope of EU legislation of financial services and that there are no rules for services related to crypto assets, including the exchange of crypto assets against national currencies or custody of crypto assets;
- focuses on services related to crypto assets for the operation of a trading platform for crypto assets, including custody and administration and services related to the placement, trading and provision of advice on crypto assets.
Crucial milestones achieved with the establishment of the recent MiCA regulation, which corresponds to our criteria for positive macroeconomic impact are:
Financial stability
- Authorizes issuing of e-money tokens only by credit institutions and electronic money institutions;
- Alignment on the basis of activity-based regulations between credit institutions and e-money institutions and other crypto asset service providers;
- Keep bank-style reserves required for stablecoins, and there is a €200 million per day cap on daily transactions.
For example, alignment with institutions may soften potential risks to financial stability alongside the volatility that the crypto asset market has seen, especially in the past 1.5 years, as pictured below.
Innovation
- Establishment of EU-wide rules for services on crypto assets;
- Crypto-issuers need to publish white papers outlining technical aspects and register with authorities.
Sustainability
- Disclosures for energy consumption and the impact of assets on the environment.
MiCA has been broadly welcomed by the industry because of its ability to increase credibility, promote adoption by conventional banks and offer crypto companies a single licence to operate across the EU. According to European Commission's Mairead McGuiness: “We're glad that we're leading on this (…) we do think there needs to be international cooperation because it's important that we don't regulate on our own.”
US regulatory frameworks
Almost simultaneously, the United States Department of the Treasury issued a framework for international engagement on digital assets, which organizes collaboration across the G7, the G20, the Financial Stability Board (FSB), the Financial Action Task Force (FATF) and the Egmont Group of Financial Intelligence Units (FIUs), the Organization for Economic Cooperation and Development (OECD), Other Standard-Setting Bodies (SSBs), the International Monetary Fund (IMF), The World Bank and other Multilateral Development Banks (MDBs) and other regional and bilateral engagements.
These regulatory and collaboration frameworks indicate a concrete step forward in letting crypto assets play a regulated role in the economy. They also promote global cooperation in the creation of the standards, which will facilitate the greatest amount of coordination. If these frameworks are applied to the criteria for macroeconomic net benefit laid out in this white paper, it is possible to project the macroeconomic effects. Looking forward, each upcoming regulatory agreement should be created with the macroeconomic impacts in mind.
Read more: https://www.weforum.org/agenda/2022/07/cryptocurrency-regulation-global-standard/
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