Indian think tank proposes new measures to mitigate crypto crashes

UAE becomes destination for bitcoin mining
UAE becomes destination for bitcoin mining

In the absence of central regulatory frameworks on crypto, think tank Policy 4.0 proposed substantial remodelling of existing internal risk frameworks and more coordinated supervision around interdependencies in crypto

Think tank for emerging technology Policy 4.0 released a report on Wednesday, highlighting the interdependencies in the crypto ecosystem and proposing risk management frameworks to mitigate and potentially prevent cascading crashes like USDTerra-Luna and FTX.

It proposed—in the absence of central regulatory frameworks on crypto—the substantial remodelling of existing internal risk frameworks and more coordinated supervision and peer learning around interconnections among blockchain networks and firms.

The suggestions follow the report’s findings that crypto contagion was transmitted not only through large actors, but also through “systemically important actors” such as Three Arrows Capital (3AC) – a crypto hedge fund that collapsed.

Further, the report found the risks from the contagion existed not only in centralised finance institutions in crypto, but also in decentralised finance (DeFi) systems.

“We hope our findings and suggestions can frontrun and inform any crypto regulations, and create a global impact towards upcoming frameworks,” said Tanvi Ratna, Founder and CEO, Policy 4.0.

“The report is based on a detailed analysis of the crypto contagion, including on-chain and off-chain data around all involved networks,” she added.

Understanding interdependencies

Policy 4.0 suggests crypto institutions (or other institutions with exposure to crypto) should make the effort to understand established interconnections and interactions that each crypto system has with the outside world.

This understanding could be used to remodel their own internal risk management and crisis control frameworks.

On partnerships and arrangements between parties involved in crypto, the think tank proposed factoring in the terms of conditions of the arrangements into internal risks management perspectives of the institutions involved.

This could “go a long way in limiting exposures from disruptions,” it said, adding that new measures could introduce innovative and nimble contingency plans for managing foreseeable risks and disruptions.

The think tank also called for greater internal board oversight and corporate governance strategies.

“For instance, issues on the access to customer funds and applications of customer investment pools which underscored the financial fraud allegations against Sam Bankman-Fried in FTX could potentially have been identified and prevented if there was an effective board to provide oversight,” it said in its report.

Limiting the number of financial functions an institution can engage in simultaneously to prevent cross-pollination of risks between sectors, it said.

All participants in a crypto ecosystem should also focus on knowledge sharing and inform the whole network of existing and emerging risks, the think tank proposed. This could help participants adjust their risk management practices accordingly.

Lack of global crypto regulations

Policy 4.0’s analysis on the crypto contagion and recommendations around risk management comes at a time when there are no central, globally-accepted frameworks on regulating crypto.

Policymakers are calling for tighter regulations, and the likes of the Financial Action Task Force (FATF), Financial Stability Board (FSB), Committee on Payments and Market Infrastructures (CPMI), International Organization of Securities Commissions (IOSCO), and Basel Committee on Banking Supervision (BCBS) have been coordinating the regulatory agenda.

India and its Finance Minister Nirmala Sitharaman have also recognised that only global cooperation can help regulate crypto.

India—which currently holds the G20 Presidency—has also asked the International Monetary Fund (IMF) and Financial Stability Board (FSB) to jointly prepare a technical paper on crypto assets, which could be used in formulating a coordinated and comprehensive policy to regulate them, as per reported by YourStory.

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