Financial Stability Board (FSB) is an international body established in 2009 under the aegis of G20 which monitors and makes recommendations about the global financial system. India, an active member, is represented in its Plenary by Secretary of Economic Affairs, Ministry of Finance, Deputy Governor of Reserve Bank of India (RBI), Chairperson of Securities and Exchange Board of India (SEBI). Recently, the FSB’s latest report on crypto-asset intermediaries called for measures to improve cross-border cooperation and information sharing among local authorities. The motive behind this is to efficiently regulate and address gaps in Multi-function Crypto-asset Intermediaries (MCIs) operating globally.
Crypto assets are digital representations of value that can be transferred, stored, or traded electronically. They include non-fungible tokens (NFTs), blockchain-based tokens representing unique assets like digital content. Crypto assets use cryptography for data protection and distributed ledger technology for recording transactions.
Understanding Multi-function Crypto-asset Intermediaries
MCIs, individual firms, or group of affiliated firms offer a range of crypto-based services, products, and functions, mainly revolving around operating the trading platform such as Binance, Bitfinex, and Coinbase. Their primary revenue comes from transaction fees generated from trading-related activities. MCIs may also derive income from operating a blockchain infrastructure, collecting transaction validation fees.
Concerns Associated with MCIs
The FSB’s report raises several concerns regarding MCIs. Firstly, they are generally not transparent about their corporate structure. Even when they do disclose information, it is typically limited to a specific jurisdiction. Secondly, the concentration of services in one place could lead to anti-competitive behavior, making the system more vulnerable and hindering new competitors. Additionally, shutting down crypto-friendly banks exposes the risk of having a substantial concentration of deposits reliant on crypto assets.
The report also points out the issues between MCIs and banks. MCIs depend on banks and payment providers for transaction services, including converting between cryptocurrencies and fiat currencies. Such dependencies could lead to counterparty issues, and if banks provide loans and credit lines to MCIs, it involves a credit risk, especially when using crypto-based collaterals which may decline in value in the future.
Ways Forward
As per the FSB report, going forward, promoting enhanced international cooperation and information sharing is important to effectively regulate and address gaps in MCIs operations. Establishing international standards for transparency and reporting could ensure a comprehensive understanding of MCIs operations across jurisdictions.
It further recommends developing and implementing clear regulatory frameworks specifically tailored to MCIs to foster market integrity, investor protection, and financial stability. It also calls for a mandate for MCIs to enhance their corporate transparency by providing detailed information on their structure, business lines, and operation.
UPSC Civil Services and Previous Year Questions
Highlighting the significance of the topic in UPSC civil services, Previous Year Question (2016) on ‘Financial Stability and Development Council’ was:
With reference to ‘Financial Stability and Development Council’, consider the following statements:
1. It is an organ of NITI Aayog.
2. It is headed by the Union Finance Minister.
3. It monitors macro-prudential supervision of the economy.
Which of these statements are correct?
(a) 1 and 2 only (b) 3 only (c) 2 and 3 only (d) 1, 2, and 3
The answer is (c).