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Positioning of the G20 on global risks posed by crypto assets –
The rapid growth of the market for crypto assets has drawn central banks and regulators around the world to these applications of distributed ledger technology. The generic term crypto-asset mainly refers to the following elements in the sense of digital assets:
- Cryptocurrency as a digital representation of value that is not legal tender, that can be exchanged for money, goods, services that have not been issued by a central issuer and that is validated by means of cryptography
- Digital tokens as an authorization that a provider sells to users in digital form, the placement being referred to as a token sale or initial coin offering (ICO)
Crypto assets have moved into the focus of the group of the twenty most important industrialized and emerging countries (G20). In February 2018, the French and German finance ministers and central bank chiefs asked in writing to put crypto assets on the G20 agenda.3 The regulatory and economic policy areas affected by global risks from crypto assets include financial stability and financial integrity . Combating money laundering and the financing of terrorism are important building blocks for safeguarding financial integrity
G20 working group on finance
Argentina took over the G20 presidency from Germany on December 1st, 2017 and hosted the G20 summit on November 30th to December 1st, 2018 in Buenos Aires (see Table 1 for the participants). The G20 meetings were initially meetings of finance ministers and central bank governors. With the global financial crisis of 2008, the revaluation came to an annual summit of heads of state and government.5 The focus of the finance working group is on financial and economic issues, including monetary policy, fiscal policy, financial regulation and international taxation. This working group is therefore a suitable forum for the global risks of crypto assets.
Participants and guests of the G20 in Buenos Aires 2018
|Participants and guests||State or group of states|
|Participants from Africa and Oceania (2)||South Africa, Australia|
|Participants from America (5)||Argentina, Brazil, Canada, Mexico, USA|
|Participants from Asia (7)||China, India, Indonesia, Japan, Saudi Arabia, South Korea, Turkey|
|Participants from Europe (6)||European Union, Germany, France, Great Britain, Italy, Russia|
|Permanent guests (1)||Spain|
|Guests of the G20 Presidency (2)||Netherlands, Chile|
|Guests who chair important regional groups (4)||Rwanda (African Union), Singapore (Association for Southeast Asian Nations), Senegal (New Partnership for Africa‘s Development), Jamaica (Caribbean Community)|
The finance working group is coordinated by the Ministry of Finance and the Central Bank of Argentina. The two highest decision-making levels are the committee of G20 finance ministers and central bank governors and the working group of their deputies (Finance and Central Bank Deputies). The G20 calendar is divided into three tracks over a twelve-month period: Finance Track, Sherpa Track and Engagement Groups (dialogue with civil society). In the Finance Track five meetings took place at the level of finance ministers and central bank presidents as well as five meetings of the deputies.
Financial Stability Board and Financial Action Task Force
International standard-setting bodies with expertise in finance and banking play a very important role for the finance working group (see Table 2). The Financial Stability Board (FSB) was founded as an international organization after the G20 in London in 2009 as the successor to the Financial Stability Forum (FSF). Members include finance ministries, central banks and financial supervisory authorities of the G20 participants as well as Spain, the Netherlands, Switzerland, Hong Kong and Singapore. Financial stability studies are usually delegated to the FSB by finance ministers and central bank governors.
Finance ministers and central bank governors' work packages on financial integrity are normally delegated to the Financial Action Task Force (FATF). The FATF develops international standards for combating money laundering and the financing of terrorism. The FATF recommendations of 2012 are currently considered a general framework.6 A guideline for a risk-based approach was adopted in 2015 specifically for virtual currencies (with cryptocurrencies as a subset ).7 There are still no FATF guidelines for digital tokens. The generic term crypto asset, which is preferred by finance ministers and central bank presidents, was not reflected in the FATF standards at the beginning of the Argentine G20 presidency.
Meeting in March 2018
The first meeting of finance ministers and central bank presidents took place on 19/20 March 2018 in Buenos Aires. Mark Carney, Chairman of the Financial Stability Board and Governor of the Bank of England, described the starting point for important work in his letter of March 13, 2018 to the Treasury Ministers and Central Bank Presidents. Crypto assets are listed under the heading “1. Careful monitoring of emerging risks ”mentioned. In his opinion, crypto assets currently do not pose any risks to the global stability of the financial system because the market is still small compared to the financial system. This assessment could change if crypto assets were to become more widespread or if they were more closely linked to the core of the regulated financial system. The FSB is committed to identifying key figures (metrics) that enable better monitoring of the risks to the stability of the financial system from crypto assets and to keep the G20 informed about developments. Due to the global nature of the markets for crypto assets, coordination should take place at the international level (see Table 2) .8
International standard setters and financial institutions
|Organization or committee||abbreviation||Seat||Current chair|
|G20 working group||G20 Finance Ministers and Central Bank Governors / G20 Finance Ministers and Central Bank Presidents||G20 FMCBG||Buenos Aires||Nicolás Dujovne, Minister of Finance of Argentina|
|International standard setters||Basel Committee on Banking Supervision / Basel Committee on Banking Supervision||BCBS||Basel||Stefan Ingves, Governor of the Swedish Reichsbank|
|Committee on Payments and Market Infrastructures||CPMI||Basel||Benoît Coeuré, Member of the Executive Board of the ECB|
|Financial Action Task Force||FATF||Paris||Marshall Billingslea|
|Financial Stability Board||FSB||Basel||Until December 1st, 2018: Mark Carney, Governor of the Bank of England; from December 2nd, 2018: Randal K. Quarles, US Federal Reserve; from 02/02/2021: Klaas Knot, De Nederlandsche Bank|
|International Organization of Securities Commissions||IOSCO||Madrid||Paul Andrews|
|International financial institutions||Bank for International Settlements / Bank for International Settlements||TO||Basel||Agustín Carstens|
|International Monetary Fund||IMF||Washington DC||Christine Lagarde|
|World Bank / World Bank||WB||Washington DC||Jim Yong Kim|
Source: own illustration.
The communiqué for the first meeting of finance ministers and central bank presidents contains an initial position on crypto assets under point 9. On the one hand, it is recognized that technological innovations, such as that of crypto assets, have the potential to improve the “efficiency and inclusion” of the financial system. On the other hand, the problem areas of crypto assets are mentioned: including investor and consumer protection, tax evasion, money laundering and terrorist financing. Based on the opinion of the Chair of the Financial Stability Board, no acute threats to financial stability have yet been seen.9 Two assignments to international standard-setters were recorded in writing:
- The FSB is commissioned, in coordination with other standard-setters such as CPMI, IOSCO and FATF, to report on the work on crypto assets up to the third meeting of finance ministers and central bank presidents in July 2018;
- the finance ministers and central bank presidents undertake to implement the FATF standards insofar as they concern crypto assets and call on the FATF to promote global implementation of the standards.
Meeting in July 2018
At the third meeting of finance ministers and central bank presidents on July 21/22, 2018 in Buenos Aires, the FSB and the FATF each presented first (short) reports with an interim status of their work. The FSB report on crypto assets lists the progress of various strands of work: 10
- The FSB and the CPMI have developed a framework and identified metrics to monitor the impact of crypto assets on financial stability (see Table 3);
- the CPMI works on applications of distributed ledger technology and deals intensively with innovations in payment transactions;
- IOSCO has founded a so-called Initial Coin Offering Consultation Network for the exchange of experience between the member authorities and is discussing the regulation of trading platforms for crypto assets;
- The Basel Committee on Banking Supervision examines the direct and indirect exposures of banks to crypto assets, clarifies the prudential treatment of these exposures and monitors developments that are relevant for banks and supervisory authorities.
The FATF report of July 2018 touches on the following aspects:
- Money laundering and terrorist financing risks,
- Overview of the regulatory environment for the G20 participants, d. H. from preparing for regulation to a ban on certain activities (see Table 4),
- Steps to adapt the FATF standards, including amendments to the FATF Recommendations from 2012 and the Guide to a Risk-Based Approach for Virtual Currencies from 2015 and
- Improving the operational capabilities of many national investigative authorities.
The authors of the FATF report from July 2018 tried to temporarily close a gaping definition gap by consistently using the slash construct “virtual currency / crypto-asset ”.11 At this point in time, the FATF standards knew virtual currencies ), but no digital tokens. These only became the subject of public warnings from supervisory authorities in 2017.12 The finance ministers and central bank presidents are to deal with both cryptocurrencies and digital tokens in the context of crypto assets. In the communiqué of July 22, 2018 for the third meeting of finance ministers and central bank presidents, the work of the FSB and the other international standard-setters to monitor the potential risks of crypto assets is welcomed under point 10. The FATF is again asked to clarify how the standards would be applied to crypto assets, this time with the target date October 2018.13
Metrics to monitor the impact of crypto assets
|Transmission channel||identification number||Information collection and sources|
|Primary Risks / Basic Market Statistics||Market capitalization (volume and growth rate), price levels and volatility of the most important crypto assets||BIS, based on public sources|
|Qualitative Developments in Non-Financial Stability Board Jurisdictions||IMF|
|Confidence Effects||Collection of qualitative market information||Regularly through the Financial Stability Board, through member organizations and through conference calls and meetings|
|Wealth Effects / Market Capitalization||Market capitalization indicators: i. Volume and growth rate, ii. Initial Coin Offerings, iii. Fiat currency inflows / outflows||BIS, based on public sources|
|Price sizes: i. Price levels, ii. Price volatility, iii. Growth rate||BIS, based on public sources|
|Institutional exposures||Key figures of the derivatives market: i. Trading volumes, ii. Price levels and open positions, iii. Number and type of clearing members, iv. Margin System Statistics||Financial Stability Board and member authorities, based on publicly available information from Central Counterparties (CCP) and / or publicly available market data|
|Market capitalization metrics||Financial Stability Board and member authorities, based on publicly available information from Central Counterparties (CCP) and / or publicly available market data|
|Bank exposures to crypto assets||BCBS|
|Payments and settlement||Widely used for payments and processing||CPMI, based on information gathering by members and the public|
|Comparison sizes||Compare volatility and correlations between major cryptocurrencies with other asset classes such as gold, currencies and stocks||BIS, based on public sources|
Source: Financial Stability Board: Crypto-assets: Report to the G20 on work by the FSB and standard-setting bodies, July 16, 2018, Annex, p. 8.
Regulatory environment for G20 participants
|Measures related to crypto assets||G20 participants|
|Regulation preparation (9)||Brazil, EU, UK, Canada, Mexico, Russia, Saudi Arabia, South Korea, Turkey|
|Reporting suspicious transactions (2)||Argentina, South Africa|
|Regulation of certain market participants (6)||Australia, Germany, France, Italy, Japan, USA|
|Prohibition of certain activities (3)||China, India, Indonesia|
Source: own illustration based on the Financial Action Task Force: FATF Report to G20 Finance Ministers and Central Bank Governors, July 2018.
Meeting in October 2018
No public documents are available for the fourth meeting of finance ministers and central bank presidents on October 11-12, 2018 on the Indonesian island of Bali. It can be assumed that the second FSB report - published on October 10, 2018 - and the preparations for the FATF General Assembly were discussed a week later for the agenda item on crypto assets.
The FSB names four primary risks in crypto asset markets: 14
- Market Liquidity Risks: There is a risk that investors in crypto assets will not be able to sell their positions.
- Volatility risks: Historical volatilities of the cryptocurrencies Bitcoin and Ether with six to 13 times the volatility of currencies, gold and stock indices have been observed.
- Leverage risks: If investors finance the purchase of volatile crypto assets with debt capital, their risk increases (leverage effect).
- Technical and operational risks, including cybersecurity risks: Crypto asset trading platforms are vulnerable to fraud, hacker attacks and other incidents and can therefore collapse and cause real losses for market participants.
In the opinion of the FSB, the primary risks can have an impact on the stability of the financial system via the following transmission channels: 15
- Confidence effects: If crypto assets are traded significantly more through financial institutions or if they are generally more widely used, primary risks that have become virulent can damage trust in financial institutions and the financial system.
- Exposures from financial institutions to crypto assets: Exposures can include direct investments, lending to investors and financial services for trading platforms and eWallet providers (digital wallets).
- Market capitalization and wealth effects: If the market capitalization of crypto assets increases to a significant level, this could affect the real economy through wealth effects, e.g. B. crypto assets would be considered as collateral for consumer and corporate loans.
- The extent to which crypto assets are used for payments and settlements.
On October 17-19, 2018, various orders from finance ministers and central bank presidents were discussed at the FATF plenary meeting and corresponding resolutions were passed. With regard to crypto assets, the 2012 FATF recommendations have been slightly updated. 16
G20 summit in December 2018 and outlook
In the G20 final declaration of December 1, 2018, the heads of state and government announced under point 25 that they would regulate crypto assets in the context of the fight against money laundering and terrorist financing according to the FATF standards. They also reserve the right to consider other reactions.17 It can be assumed that crypto assets will also be on the agenda of the G20 meeting in Osaka in 2019.
- 1 Cf. IMF Staff: Virtual Currencies and Beyond: Initial Considerations, IMF Staff Discussion Note, January 2016, p. 8.
- 2 See O. Read, K. Gräslund: Initial Coin Offerings: Regulation in Germany and Switzerland, in: Corporate Finance, 9th year (2018), no. 11/12, pp. 313-319.
- 3 See Banque de France, Ministère de l'Économie et des Finances, Federal Ministry of Finance, Deutsche Bundesbank, letter to Nicolas Dujovne (Minister of Finance Argentina) dated 7.2.2018, https://www.politico.eu/wp- content / uploads / 2018/02 / G20-Letter-on-crypto-assets-tokens.pdf (22.11.2018).
- 4 Cf. O. Read, K. Gräslund: EU regulation of Bitcoin and other virtual currencies: first steps, in: Wirtschaftsdienst, 98th vol. (2018), no. 7, pp. 504-511.
- 5 cf.The Federal Government: History of the G20 Summit: The Way to Hamburg, https://www.g20germany.de/Webs/G20/DE/G20/Geschichte/geschichte_node.html (22.11.2018).
- 6 See Financial Action Task Force: International Standards on Combating Money Laudering and the Financing of Terrorism & Proliferation, The FATF Recommendations, Adopted by the FATF Plenary in February 2012, Updated February 2018.
- 7 See Financial Action Task Force: Guidance for a Risk-Based Approach to Virtual Currencies, June 2015.
- 8 See Financial Stability Board: (Chairman's Letter) To G20 Finance and Central Bank Governors, 13.3.2018, p. 2, http://www.fsb.org/wp-content/uploads/P180318.pdf (22.11.2018 ).
- 9 Cf. G20 Finance Ministers and Central Bank Governors: Communiqué, Buenos Aires, 19-20 March 2018, pp. 2-3, https://g20.org/sites/default/files/documentos_producidos/communique_-_finance_and_central_banks_-_march_2018_0 .pdf (November 22, 2018).
- 10 See Financial Stability Board: Crypto-assets: Report to the G20 on work by the FSB and standard-setting bodies, July 16, 2018.
- 11 See Financial Action Task Force: FATF Report to G20 Finance Ministers and Central Bank Governors, July 2018.
- 12 See International Organization of Securities Commissions: IOSCO Board Communication on Concerns Related to Initial Coin Offerings, January 18, 2018, https://www.iosco.org/news/pdf/IOSCONEWS485.pdf (November 22, 2018).
- 13 Cf. G20 Finance Ministers and Central Bank Governors: Communiqué, Buenos Aires, July 21-22, 2018, https://g20.org/sites/default/files/documentos_producidos/communique_-_finance_and_central_banks_-_july_2018.pdf (November 22, 2018 ).
- 14 Cf. Financial Stability Board: Crypto-asset markets: Potential channels for future financial stability implications, 10.10.2018, pp. 5-8.
- 15 See ibid., Pp. 8-12.
- 16 See Financial Action Task Force: Regulation of Virtual Assets, October 19, 2018; see Financial Action Task Force: International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, The FATF Recommendations, Adopted by the FATF Plenary in February 2012, Updated October 2018.
- 17 See G20 Argentina 2018: G20 Leaders ‘Declaration, Building consensus for fair and sustainable development, Buenos Aires, November 30-1.12.2018
Title: Positioning of the G20 on Global Risks Arising from Crypto-Assets
Abstract: The G20 and the international standard-setting bodies did not make any major decisions regarding crypto-assets at the 2018 G20 summit in Buenos Aires. At the moment, the potential global risks are perceived as too insignificant to endanger the stability of the financial system. Therefore, for the time being only monitoring is required. The Financial Stability Board proposed a framework with metrics in order to monitor financial stability risks arising from crypto assets. An intention to regulate was only stated for the financial integrity. The international standards of the Financial Action Task Force on Anti-Money Laundering and Countering the Financing of Terrorism have been updated slightly.
JEL Classification: F53, F65, G01, G18, G28
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