Tag: regulators

Cryptos, far from the regulators’ glare

Banking & Finance

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The manner in which cryptocurrencies which began as innocuous playthings of geeks went on to become the most sought after asset class and a threat to traditional cross-border payment channels, while managing to stay beyond the reach of regulators, shows the challenges that digital innovation pose.

The original white paper on Bitcoin, put out by its founder, the anonymous Satoshi Nakamoto, described it as, “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Most regulators did not take it seriously then, since its usage appeared to be limited to a few rebels who wanted to express their displeasure against the traditional fiat currencies. But Bitcoin has cloned thousands of other cryptocurrencies, which are no longer innocent payment channels but have morphed into a highly speculative asset and conduits of illicit cross-border money transfers.

The experience with cryptocurrencies shows that fintech products and innovations need to be taken more seriously going ahead and quickly brought under the regulatory radar before they grow in to a many-headed monster. There are other similar digital innovations such as digital lending or algo trades that have grown surreptitiously in the shadows in a similar manner with the regulators struggling to frame rules them.

Digital lending entities

More than a decade ago, the usurious practices of microfinance companies charging exorbitant rates of interests, harassing and shaming borrowers had led to a spate of suicides making the RBI issue regulations to check the lenders in this space. The same sequence of events is now being repeated, but in digital space.

As the Covid-19 pandemic hit the livelihoods and small businesses, digital lending apps turned out to be a ready source of money to these small borrowers. While funds could be accessed for extremely short periods, ranging from 7 to 15 days, the rates of interest charged by the digital lenders were extremely high, ranging from 60 to 100 per cent, according to reports. These apps required the borrower to give them permission to access all the information on their smartphones under the garb of doing KYC checks. The problem started when the borrowers were unable to repay the loans. They were harassed, publicly shamed and even blackmailed leading to some borrowers even resorting to the extreme step of taking their lives.

The RBI had taken note of these malpractices and issued an advisory in December and had also opened a portal for registering complaints. It recently set up a working group to give recommendations on regulating these businesses.

The swiftness shown by the central bank in trying to bring digital lending entities under regulatory purview is laudable. It’s clear that there is demand for loans from such digital lenders and total clamp-down on this space is not a good idea. Weeding out the bad players and ensuring that the lending activities continue with sufficient protection to borrowers is the way forward.

But the point to note is the manner in which the miscreants were quick to find a regulatory gap and begin operations. This requires equal amount of agility from regulators as well.

Dealing with algo trading

Another instance of a digital innovation blind-siding regulators was seen in the proliferation of algorithmic or programmed trading in Indian stock exchanges. These trades that require little or no manual intervention, where computer programs shoot orders to the exchange servers at lightning speed, currently account for over 60 per cent of turnover in derivatives section and 50 per cent in cash segment of the NSE.

There was a lot of furore about these algo trading around 2012 when it was first revealed that programmed trading, especially from colocation sites located close to exchange servers, are ahead of the small investors in trade execution due to their proximity to the exchanges. Further, the high-frequency-trading programs and other rogue programs were gaming the market to stay ahead of other traditional traders.

But no one could explain how or when algo trading had started on Indian exchanges and how they had become so widespread by 2012. The market regulator was in a fix then, since banning algos would have resulted in depriving liquidity from market and making FPIs turn away. SEBI decided to embrace algos and regulate them by issuing guidelines to exchanges, intermediaries and investors about dealing with algos.

We had dealt with this logjam in https://www.thehindubusinessline. com/opinion/columns/lokeshwarri-sk/ learn-to-live-with-algo-trading/ article22995759.ece

Regulating cryptos will be tricky

With fintech adoption growing at a break-neck speed in the country with growing smart phone and data accessibility, it is clear that innovative products that fox regulators and at times border on the illegal will keep cropping up. Regulators need to be on their toes and increase the strength of their digital surveillance team which has the skills to understand these products.

But, while innovations like digital lending and algo trading can be regulated and streamlined by regulators, cryptocurrencies will be much more challenging. This is because — one, it is hard to categorise cryptocurrencies as either currency or asset. So determining the regulator for them is quite difficult. Two, the creation or mining of the cryptocurrencies takes place globally and hence cannot be controlled. While trading can be banned in India, it will continue in other global trading platforms which can be easily accessed by Indians. Three, the investors of these crypto assets are mostly not the investors of traditional asset classes.

Hence it may not be possible for issuing reactive regulations for these crypto assets and absorb them into the mainstream as done for other tech innovations. A global consensus on crypto mining and trading could be the way forward, with uniform rules and regulations framed for crypto trading platforms in all countries. While the contours of the Cryptocurrency Bill to be presented in Parliament is awaited, the last word has not yet been said on taming this beast.

The last two decades have seen rapid innovation in fintech with these digital entities seeping into spaces hitherto occupied by traditional banks, insurance companies, stock brokers, investment advisories, and so on. Some of these entities have tried pushing the boundary between the acceptable and unacceptable, ethical and unethical, legal and illegal and, in many instances, regulators have been caught sleeping at the wheel. Regulators will have to upskill and increase the manpower equipped to deal with fintech entities so that they are not caught off-guard, once too often.

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US banking regulators to clarify banks’ crypto role in 2022, BFSI News, ET BFSI

Personal Finance

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WASHINGTON: US banking regulators intend to clarify in 2022 what role traditional banks can legally play in the cryptocurrency market, they said on Tuesday.

In a statement, regulators said they plan to make clear what sort of activities banks can engage in involving cryptocurrency, including holding it on their balance sheets, issuing stablecoins and holding crypto assets and facilitating crypto trading on behalf of customers, among other currently murky areas.

The joint statement from the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency is an update on work done by an interagency “sprint” team convened earlier this year.

While not providing details, the agencies said the rapid growth of cryptocurrency presents “potential opportunities and risks” for traditional banks. They said regulators want to provide “coordinated and timely” clarity to the institutions they monitor.

“The agencies have identified a number of areas where additional public clarity is warranted,” the agencies said. “Throughout 2022, the agencies plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations.”

Agency officials have been working on identifying risks facing banks engaging in crypto activity, as well as whether existing regulations must be updated to account for that activity.



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Stablecoins face crackdown as US discusses risk council review, BFSI News, ET BFSI

Personal Finance

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U.S. officials are discussing launching a formal review into whether Tether and other stablecoins threaten financial stability, scrutiny that could lead to dramatically ramped-up oversight for a fast-growing corner of the crypto market.

After weeks of deliberations, the Treasury Department and other federal agencies are nearing a decision on whether to launch an examination by the Financial Stability Oversight Council, said three people familiar with the matter who asked not to be named in commenting on closed-door discussions. FSOC has the power to deem companies or activities a systemic threat to the financial system — a label that typically sets off tough rules and aggressive monitoring by regulators.

Such a designation would likely be a gamechanger for stablecoins, which are considered crucial to the crypto market because traders widely use them to buy Bitcoin and other virtual currencies.

Stablecoins have thrived in the unregulated shadows, with tokens in circulation now worth more than $120 billion, according to CoinMarketCap.com. And they are increasingly being used for transactions that resemble traditional financial products — like bank savings accounts — without offering anywhere near the same level of consumer protections.

A hallmark of stablecoins is that they are pegged to fiat currencies, meaning they are supposed to be immune to the wild price swings that have plagued Bitcoin. Tether and other firms achieve that by backing their tokens with assets like U.S. dollars and corporate debt.

The President’s Working Group on Financial Markets, which is led by Treasury Secretary Janet Yellen, has been particularly focused on Tether’s claims that it holds massive amounts of commercial paper — debt issued by companies to meet their short-term funding needs. In a private meeting U.S. officials held in July, they likened the situation to an unregulated money-market mutual fund that could be susceptible to chaotic investor runs if cryptocurrencies plunge.

The President’s Working Group plans to issue stablecoin recommendations by December, and a consensus is building among regulators involved that an FSOC review is warranted, the people said. The groups overlap, as Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission Chair Gary Gensler are members of both the PWG and oversight council.

A Treasury spokesman declined to comment.

The FSOC process includes a lengthy study and an assessment of which federal agencies should respond and how. In the end, the council could direct those agencies to intervene in the market and reduce the dangers posed by stablecoin transactions.

While Tether is the most popular stablecoin, there are multiple rivals, including Coinbase Global Inc.’s USDC token and a dollar-linked offering from Binance Holdings Ltd.

Scrutiny has been ratcheting up as stablecoins proliferate. Coinbase made headlines this week by disclosing the SEC had threatened to sue if the crypto exchange launched a product that would allow customers to earn 4% yields for lending out their USDCs to other traders. The SEC believes the Coinbase proposal is an investment contract that should be registered with the agency, a view the company aggressively contested in a blog post and a series of tweets.

Watchdogs have also privately expressed worries about Diem, a stablecoin being developed by an association that includes Facebook Inc. A top concern is that the token’s market impact could be massive because of its potential for widespread adoption — Facebook’s social media network has almost 3 billion active users.

Treasury held meetings this week with industry representatives to ask them about the potential dangers associated with stablecoins. As it and other agencies consider taking action, they’re facing intense pressure from Capitol Hill.

“I urge FSOC to act with urgency and use its statutory authority to address cryptocurrencies’ risks,” Senator Elizabeth Warren wrote in a July 26 letter to Yellen that flagged the stablecoin market’s interconnectedness and its susceptibility to investor runs. “The longer that the United States waits to adapt the proper regulatory regime for these assets, the more likely they will become so intertwined in our financial system that there could be potentially serious consequences.”

Stablecoins already face another threat from the U.S. government, as the Fed is discussing whether to launch its own digital currency. Powell told lawmakers in July that a central bank token would make stablecoins obsolete.

“That’s one of the stronger arguments in its favor,” he said.



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Debt market development an unfinished agenda, says Finance Secretary Somanathan

Banking & Finance

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The Finance Ministry is fully conscious that the debt market in India is not as well developed as it should it be, according to T.V. Somanathan, Finance Secretary. He said that government’s ‘Aatmanirbhar’ campaign should not be seen as India turning “protectionist” and highlighted that incremental protectionism maybe needed as a “transitional measure” in a few sectors to support “an infant that must grow up”.

Addressing the NCAER organised India Policy Forum 2021, Somanathan noted that the development of the debt market continues to be “somewhat handicapped” by two regulators who look at things very differently.

It maybe recalled that SEBI has been making a case for the unification of the G-Sec and corporate bond markets. It had contended that a unified market would enable trading of government securities (G-secs) on the same platform as corporate bonds, thereby utilising common infrastructure for trading, clearing, settlement and holding of securities. It is perceived that the RBI, which is the government debt manager, is not on the same page as SEBI on this front.

BANKING REFORMS

Meanwhile, Somanathan said the government continues to work on its stated position that most of the public sector banks will be eventually privatised. “Banking will be one of the sectors where a bare minimum of the public sector will remain. This is the government’s stated policy,” he said.

He was responding to the suggestion by Montek Singh Ahluwalia (a key member of the erstwhile Congress-led UPA government) that the government must now focus on getting the banking sector reforms done. He highlighted that while the reforms pursued earlier brought in the more easy part of aligning the regulatory framework with Basel norms, the more difficult part of putting the public sector banking system competitively on a par with the private sector banking system was not done as yet.

While the good thing is that private sector banks have been liberalised and allowed to expand, the public sector banks remain under strict government control, Ahluwalia noted.

Ahluwalia suggested that the government must implement the P J Nayak Committee report recommendations so that the control of the Finance Ministry on the public sector banks (PSBs) are reduced and would also ensure that the RBI’s regulatory powers on PSBs come on a par with what the central bank had in the case of private sector banks.

PROTECTIONISM

Somanathan, who prefaced his remarks at the meeting with a disclaimer that they were his personal views and not that of the government, he asserted that the government was not looking to turn “protectionist” through the Aatmanirbhar Abhiyan campaign. He, however, noted that government was open to incremental protectionism in certain areas of the economy as a transitional measure for “an infant that must grow up”.

“I know that some of our infants refuse to grow up. But if we can get some of them to grow up, then there is a case in some areas”, Somanathan said.

He underscored the need to distinguish between the multilateral trade liberalisation that happened in the nineties and early part of first decade of this century and the FTAs India has signed with a particular group of countries in the last 20 years.

“The evidence is that some of FTAs have had very large trade diversionary effects. Because some members of FTA are adept practitioners of non-tariff barriers, the benefit side of FTA has not picked up as we thought it would. The important issue for us now is not free trade vs protectionism.

There is no tilt to protectionism (via Aatmanirbhar Abhiyan) but to ensure critical supply chains are available locally and don’t have to depend on imports for intermediate goods needed to make drugs and essential devices or things like that,” he added.

Somanathan said temporary protection to a few targeted industries that have potential to become winners may be appropriate in the current times.

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