The Economic Survey 2022-23 has advocated for a common approach to regulating the cryptocurrency ecosystem, noting that the volatility of the ecosystem has bought to the forefront governance problems, weak backing, complexity, and non-transparency.
“The geographically pervasive nature of the crypto ecosystem necessitates a common approach to the regulation of these volatile instruments,” the survey, tabled in Parliament on January 31, read. It said crypto assets are self-referential instruments and do not strictly pass the test of being a financial asset because they have no intrinsic cashflows attached to them.
Regulating cryptocurrencies has been tricky across the globe, given the new and emerging issues in the fast-moving uncharted field, it noted. The survey mentioned the recent collapse of the crypto exchange FTX and its aftermath, saying this turned a spotlight on the vulnerabilities in the crypto ecosystem.
“The fact that they are yet largely unregulated is a cause for concern globally,” the report read. It noted that while crypto assets were apparently designed to disintermediate traditional financial services, this has created new unregulated intermediating entities.
The promise of decentralisation has yet to be realised in practice. New centralised intermediaries, such as crypto asset exchanges, wallet providers, and crypto conglomerates, require users to trust centralised entities. The increasing importance of these entities could force regulators to consider them as systemic financial market infrastructures, it said.
There are minimal global standards applicable to unbacked crypto assets, which do not currently mitigate all risks and vulnerabilities. Even as standard-setting bodies (SSBs) are attempting to adjust and develop standards, they remain focused on specific issues or entities designated as systemic by domestic authorities. Thus, there are regulatory gaps in each stage when crypto assets are issued, transferred, exchanged, or stored by non-bank entities, the survey noted.
