India's G20 Note on Crypto Regulation and What It Means for Your Portfolio
Yesterday India, the current G20 president, published a 'presidential note' [PDF] regarding a roadmap for global crypto regulation. Here's what it says, and what it could mean for your crypto portfolio.
What’s the ‘Presidential Note’ about?
To start, it's a document about a document about a document.
The presidential note is an input for a roadmap document that the IMF and the 'Financial Stability Board' are creating. That in turn will become a future Synthesis Paper document, which will suggest minimum regulations for G20 members.
India's note recommends that the IMF/FSB roadmap incorporate
analysis and monitoring of macro-financial risks of crypto
outreach to lawmakers on awareness of theses risks and enforcement of standards
implementation of their recommendations by G20 members
'cross-border information sharing' to fill in 'data gaps'
This is great news for a crypto token portfolio.
To someone building a crypto assets portfolio, this is good news. The focus on investor protection means
greater security for the storage of tokens
greater disclosure at exchanges, and
more transparency by crypto projects themselves
In the best case we'll see the same global market for crypto assets that exists today but with the protections of traditional assets.
What is the G20 Crypto Approach Missing?
But FNDX also thinks there is not enough discussion of what blockchain-native projects actually entail.
We wonder if this stems from a lack of wide, in-depth understanding of the nature of token-incentivised, blockchain-native applications – what we commonly call 'Web3'.
The top 10 common terms used in the document are
Framework - 10 instances
Work - 10
Implementation - 9
Regulation - 8
IOs (International Organizations) - 8
Standards - 8
FSB (Financial Stability Board) - 7
Crypto assets - 7
G20 - 6
Paper - 6
There is only one reference to "facilitate development of the underlying technology and encourage innovations in the financial sector".
In fact, the annex to the note that lists work being done in the regulatory space also refers to just stablecoins and DeFi, or decentralised finance. Everything else is lumped under 'other crypto assets'
That's an extremely limited view of what is a disruptive technology that touches every aspect of how we do business.
On-chain tokens are not just financial assets or speculative instruments or means of anonymous payments. Tokens align incentives among the different participants in a web3 project. These thousands of tokens are the fuel for the hundreds of thousands of smart contracts that are the core software of blockchain applications.
Salesforce, Microsoft, eBay, Google are all 'Web2' applications that involve money in some way, but you'd hardly call them financial services.
In fact, token-incentivised projects create a whole new kind of organisation, which we discussed in our post "Building a Web3 portfolio: hold tokens or hold equity?"
FNDX's concern is that since these laws are being made by financial regulators, the entire space is being viewed through a financial lens as opposed to a software, technology, organisational or social lens.
It's likely that an appreciation of these other aspects will come only a few iterations after the initial limited, punitive, risk-centric framework. There's a risk that a lot of innovation will be made impossible by applying requirements from an older generation to the next.
An example from a few years ago is the proposed USA law to require miners (e.g. Bitcoin miners) to perform KYC for the entities whose transactions they were validating. This is – for various fundamental reasons we will not get into here – quite impractical.
Net-net, the G20 Focus on Crypto is a Good Thing.
Regardless of these challenges, it is encouraging that regulators around the world are working on incorporating this disruptive technology and its opportunities/risks into their world view, instead of simply banning it altogether.
This high-level, high-visibility approach gives FNDX confidence that we will transition many many aspects of our life to a safe, open, transparent, borderless Web3 economy over the long term.
This is also why FNDX's own approach is to take a 3-5 year horizon for the value proposition of its token strategies to play out.
And finally, which is also why people's crypto portfolios will also benefit from such a long term approach.
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