ECONOMICS FOR BUSINESS STUDIES (ECO745)

CASE STUDY
Answer both case studies provided below (Total: 100 marks).

CASE STUDY 2:

A. MANAGING THE EXPANDED SAFETY NET

Overall confidence and stability in the financial sector has been preserved throughout the period of the
global financial crisis, underpinned by a strong financial sector and negligible exposure to subprime-
related assets and affected counterparties. The greatest risks posed to banks by the slowdown of
economic growth take the form of credit risks. So far, the number of loans in default is still relatively
small, but it is increasing and is expected to grow two or threefold. The first signs of this can already be
seen in the number of bankruptcies declared, which is rapidly increasing.

Too big to fail (TBTF) is the concept to integrate to the financial crisis of the late 2000s when the U.S.
government disbursed $700 billion to save companies, such as AIG, that were on the verge of financial
failure. The bigger the government safety net, the more the government shifts risk from creditors of
financial firms to taxpayers. With less to lose, creditors have less incentive to monitor financial firms
and to discipline risk-taking.

Now, this dulling of the depositors’ senses has the welcome effect in our example of stopping runs on
the largest banks but at the same stickiness of deposits has a major downside. The large bank that
fleeing depositors would otherwise close remains open to continue or increase its risky bets. If it does
not get lucky, the bank’s losses actually grow. In this way, the safety net encourages risk-taking that
exposes society to increasing losses, with their associated instability.

Prior to the crisis, numerous academic studies and banking textbooks discussed the too-big-to-fail
problem and moral hazard more generally. However, for those who have written about these issues for
many years, the true depth and seriousness of the concerns were only revealed during the recent
financial crisis. It is surprised to hear the occasional voices which claim that the too-big-to-fail problem
is overstated. It is imperative that we not only cope with the too-big-to-fail problem, but that we also
deal with it effectively. The capital surcharge for global systemically important banks introduced by the
Basel Committee is a significant step in the right direction. The same is true of the progress on improving
recovery and resolution planning.

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QUESTION 1
What is Safety Net for Banking?

Johnson, G. G. (1983, September 01). Aspects of the safety net for international banking: The
safeguards examined. eISBN: 9781616353544. Explain The term "safety net" in the realm of
international banking encapsulates a multifaceted set of mechanisms and safeguards meticulously
designed to ensure the stability and functionality of the banking system.
The safety net operates both domestically and internationally with the primary goal of preventing bank
collapses, minimising the consequences of any failures that may happen, and maintaining the essential
intermediate functions offered by banks in the global financial system.

Components of the Safety Net

a) Prudential measures are proactive strategies implemented by banks to mitigate the risk of
collapse. These requirements cover a range of criteria, such as methods for evaluating credit,
internal control measures, spreading out assets and liabilities, restrictions on changing the
maturity of investments, and maintaining enough bank capital to handle any losses.

b) International coordination of banking supervision is crucial in the field of international banking.

Organisations like the Basle Committee on Bank Regulations and Supervisory Practices play
a major role in coordinating supervisory activities. This cooperation not only ensures that no
institution escapes the oversight of banking supervision but also promotes the improvement of
sensible practices on a worldwide level.

c) Central banks often act as lenders of last resort, providing financial assistance to solvent
institutions facing temporary liquidity problems. Nevertheless, this position brings forward the
notion of "moral hazard," whereby the presence of official assistance may undermine market
accountability. This support encompasses instruments such as deposit insurance and actions
aimed at resolving failing banks.

d) Deposit insurance is less relevant in international banking because it provides limited coverage
for international deposits. However, it continues to be an essential aspect in domestic banking.
It provides reassurance to depositors, confirming the security of their deposits even in unstable
financial organisations.

e) Management of Subsidiaries: The management of overseas subsidiaries during crises presents

challenges associated with accountability. Branches generally receive assistance from the
parent authority, but ambiguities arise when it comes to subsidiaries, especially if the parent
entity is also experiencing financial difficulties. Instruments such as "letters of comfort" can
establish moral accountability in such circumstances.

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 f) System-wide liquidity refers to the ability of lenders of last resort to provide sufficient availability
of domestic currency. However, when capital outflows affect exchange rates or deplete foreign
exchange reserves, resolving the impact on balance of payments may require implementing
additional measures.

The safety net in international banking functions as a fragile balance between promoting a competitive
banking system, permitting inadequately managed banks to collapse, and reducing systemic risks to
maintain trust in the financial system. It combines cautious actions, global cooperation, government
backing, and specific protocols to tackle financial difficulties. The recent challenges faced by the
international banking sector, such as debt crises and the spread of problems among significant
borrowers, have prompted a re-evaluation of the safety measures in place. This highlights the
importance of strengthening the different parts of the safety net to ensure long-lasting resilience.

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QUESTION 2
What do you understand about Too Big To Fail (TBTF)?

According to Omarova, Saule T., "The 'Too Big To Fail' Problem," 103 Minnesota Law Review 2495
(2019). The term "Too Big To Fail" (TBTF) describes the repetitive occurrence of government rescues
of significant financial firms that have a substantial impact on the whole system. The term "privatising
gains and socialising losses" gained currency during the 2008 financial crisis, as it captured public
dissatisfaction with the practice of transferring profits to private entities while burdening society with the
costs of losses. The Too Big to Fail (TBTF) problem is defined by a basic paradox: it serves as a
metaphor at the micro-level, focusing on individual entities, while representing a set of interconnected
systemic issues at the macro-level. The interplay between the micro and macro levels significantly
influences the development and execution of regulatory reforms in the financial sector following the
2008 crisis. The TBTF metaphor can be analysed by breaking it down into two fundamental elements:
the "F" factor, which pertains to the failure of specific financial institutions, and the "B" factor, which
pertains to their large size and structural importance. The current discourse on public policy generally
centres around the inadequacy of individual enterprises, prioritising micro-level remedies rather than
expressly macro-level ones. The existing conflict has resulted in a lack of comprehension of the "too
big to fail" dilemma, necessitating the development of more efficient and cohesive ways to tackle the
systemic complexities of this issue.

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QUESTION 3
In the light of such uncertainty and measurement problems, what are the objectives of regulatory
policies developed to address the too-big-to-fail problem?

The issue of "Too Big To Fail" (TBTF) in the financial industry has consistently been a central focus of
regulatory attention, as it involves managing the complex interplay between the collapse of individual
firms and the larger risks they pose to the entire system. This essay examines the goals of regulatory
measures aimed at addressing the "Too Big to Fail" (TBTF) issue and argues for a broader range of
strategies to solve the inherent difficulties. Based on Saule T. Omarova's research, the debate
focuses on addressing systemic risk, promoting market discipline, and assuring orderly resolution as
primary goals.

a) Addressing Systemic Risk:

The main goal of regulatory regulations is to reduce the systemic risk linked to major financial
institutions. These policies aim to protect the whole financial system by strengthening its
ability to withstand challenges and minimising the chances of failure. Omarova's analysis
highlights the significance of directly tackling the systemic dynamics, arguing for what she
refers to as "B" factor solutions. These measures entail setting explicit constraints on the size
of companies and adopting activity-based restrictions to reduce their systemic importance
and influence.

b) Promoting Market Accountability:

In order to address the moral hazard that is inherent in the concept of "Too Big to Fail"
(TBTF), regulatory regulations are designed to provide market discipline. This entails
establishing systems that ensure the accountability of major financial institutions for their risk-
taking actions, so enhancing their responsiveness to market indicators. Omarova's research
emphasises the necessity of adopting a more proactive strategy, indicating that resolving the
TBTF issue necessitates prioritising limitations on size and implementing structural
segregation. Regulators can diminish the systemic significance of financial institutions and
mitigate risk-taking behaviour by imposing size restrictions and implementing activity
segregation.

c) Ensuring a methodical and organised resolution:

Policies also prioritise the establishment of structures to systematically resolve failed
institutions in order to mitigate the impact on the wider financial system. This encompasses
efficient tools for the orderly resolution or reorganisation of significant financial institutions
without precipitating a systemic catastrophe. Omarova's viewpoint advocates for a thorough
approach that includes a broader set of actions aimed at addressing systemic dynamics more

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 directly. This approach guarantees that regulatory actions not only tackle individual-level
shortcomings but also take into account broader systemic challenges.

d) Enhancing the Too Big to Fail (TBTF) Policy Toolkit:

In order to enhance traditional regulatory methods, it is crucial to broaden the TBTF policy
toolkit by incorporating more extensive and assertive "B" factor solutions. Some strategies to
address these issues include implementing limits on the size of entities and separating their
structures to reduce their systemic importance. Another approach is to adopt a market-wide
perspective that focuses on addressing unwanted dynamics. Additionally, introducing
Systemically Significant Prices and Indices (SIPIs) can help prevent systemic instability.
Furthermore, there is a suggestion to create a National Investment Authority (NIA) with the
purpose of directing private resources towards infrastructures that promote economic growth.

To summarise, resolving the issue of "Too Big To Fail" requires a comprehensive regulatory strategy.
The main goals are to reduce the impact of systemic risk, promote market discipline, and provide a
smooth resolution process. Saule T. Omarova's perspectives promote a transition towards "B" factor
solutions, highlighting the significance of directly tackling systemic dynamics. To address the issues
posed by systemic financial institutions, regulators can adopt a proactive approach by implementing
bold and comprehensive policies in the "Too Big to Fail" (TBTF) policy toolkit.

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QUESTION 4
In your opinion, what is the best solutions to change the expectations of bailouts?

Omarova, Saule T., "The 'Too Big To Fail' Problem," published in the 2019 edition of the Minnesota
Law Review, volume 103, issue 2495. A comprehensive and assertive strategy to tackling the systemic
dynamics that perpetuate the "too big to fail" (TBTF) problem is suggested by the term "Too Big To Fail"
(TBTF), which suggests that the best ways to changing the expectations of bailouts require going after
the systemic dynamics that are responsible for the problem.

One example of this is the implementation of creative reforms that create new chances for the more
efficient channelling of financial resources into productive economic companies, as opposed to
damaging speculation in financial instruments. With the help of rebalancing the actual economy of the
nation, it is also possible to assist in rebalancing the structural and functional aspects of the financial
system.

Furthermore, it is of the utmost need to broaden the scope of "B" factor solutions, which are solutions
that directly address specific dysfunctions in the functioning of financial markets, and to increase the
potential impact of these solutions.

In order to influence the broad structural dynamics in the financial sector, this can involve the
implementation of measures such as size caps, structural separation, and the utilisation of existing
regulatory and supervisory tools in a more forceful and consistent manner. A strategy that is more
coherent and integrated can be designed to eradicate the phenomenon of TBTF and shift the
expectations of bailouts. This can be accomplished by addressing the systemic dynamics that hamper
the ability of traditional TBTF remedies to provide the results that they are supposed to give.

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QUESTION 5
List three approach should policymakers do to address concerns over spillovers?

Omarova, Saule T., authored an article titled "The 'Too Big To Fail' Problem," which was published in
the 2019 edition of the Minnesota Law Review, specifically in volume 103, issue 2495. The term "Too
Big To Fail" (TBTF) suggests a comprehensive and assertive plan to address the systemic dynamics
that perpetuate the problem. Policymakers should examine the following approaches:

a) Enhancing Current Tools: Policymakers have the ability to bolster existing regulatory measures,
such as implementing limitations on size and enforcing structural separation. Through the
implementation of these measures, it is possible to specifically focus on the systemic
importance of financial institutions, thereby decreasing the probability of spillovers and systemic
repercussions resulting from the failures of individual enterprises.

b) Policymakers should implement policies that target systemically significant pricing and indices
(SIPIs) in order to mitigate market vulnerabilities and decrease the likelihood of widespread
market manipulation and conflicts of interest. This method entails submitting the process of
creating and maintaining Systemically Important Payment Institutions (SIPIs) to specifically
designed regulatory standards, strengthening oversight for antitrust and antifraud activities, and
implementing regulatory measures similar to those used to public utilities for some SIPIs.

c) Policymakers might mitigate concerns over spillovers by redefining the primary structural
border in the financial sector, distinguishing between financial institutions principally engaged
in capital-raising and those facilitating the trading and transfer of financial risk. The objective of
this approach is to redirect regulatory focus towards the fundamental causes of systemic
financial instability, such as the persistent misallocation of credit and the expansion of
speculative secondary-market trading.

To enhance the stability and resilience of the financial system, authorities can minimise spillovers and
control the potential damage caused by individual firms' failures through the implementation of these
techniques.

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B. CASE STUDY:
When is a bitcoin not a bitcoin? When it’s an asset, says G-20
Bloomberg, Tuesday, 20 Mar 2018, 2:17 PM MYT

BUENOS AIRES: Finance ministers seeking to crack down on tax evasion this week in Buenos Aires
have cryptocurrencies like Bitcoin at the forefront of their minds.

The Group of 20 countries are moving to a consensus that cryptocurrencies aren’t money after all, but
an asset. That means trades potentially could be subject to capital gains tax.

Cryptos “lack the traits of sovereign currencies,” according to a draft G-20 communique obtained by
Bloomberg. The G-20 ministers are scheduled to discuss the issue in full Tuesday afternoon.

“Whether you call it crypto assets, crypto tokens -- definitely not cryptocurrencies -- let that be clear a
message as far as I’m concerned,” said Klaas Knot, president of De Nederlandsche Bank NV, who also
chairs the Financial Stability Board’s standard committee on the assessment of vulnerabilities.

“I don’t think any of these cryptos satisfy the three roles money plays in an economy.”

It’s already proving an issue in the U.S., where only a tiny fraction of Americans are reporting their
crypto deals to the Internal Revenue Service, according to Credit Karma Inc. Less than 100 of the first
250,000 federal tax returns filed as of February 2018 included a declaration related to crypto gains and
losses, it found.

While few officials at the G-20 were talking about cryptos six months ago, it’s been hard to escape this
year, after one of the wildest investment manias in history that’s led to worries about money laundering,
cyberthefts, excessive speculation and more.

The Financial Stability Board, which is chaired by Bank of England Governor Mark Carney, warned
Sunday the rapid growth of cryptocoins such as Bitcoin may one day make them a threat to the financial
system.

Countries are keen to set up an international regulatory framework while the crypto industry is still in its
early stages, hoping to avoid a repeat over how to tax tech giants like Alphabet Inc.

Here are some developments and comments over the past week on the issue:

• U.S. President Donald Trump signed an executive order to ban U.S. purchases of a cryptocurrency
the Venezuelan government is rolling out, as part of a campaign to pressure the government of
President Nicolas Maduro

• Cryptos lack the stability and ease of payment that characterize currencies, Brazil central bank
President Ilan Goldfajn said at a G-20 event in Buenos Aires. “It’s more of a token asset than a
currency,” he said

• The U.K. Finance Ministry is set to establish a task force with the Bank of England and Financial
Conduct Authority that will examine risks of cryptos

• “It’s very important to consider consumer and investor protection and how to prevent inappropriate
trading such as money laundering. On the other hand, new technology like blockchain can have a
positive effect” on the financial system, said Bank of Japan Governor Haruhiko Kuroda

• “Crypto is more an asset than a currency,” French Finance Minister Bruno Le Maire said in Buenos
Aires. “If we want to move on and protect citizens from any kind of speculations or money laundering
or terrorism financing, we need rules.”

• “The first function of a currency is to serve as a stable medium of exchange, and experience today
with various crypto assets in circulation are not at all satisfactory in this regard,” Saudi Arabian Monetary
Authority Governor Ahmed Alkholifey said at the IIF Conference on the sidelines of the G-20 meetings.

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Source: https://www.thestar.com.my/business/business-news/2018/03/20/when-is-a-bitcoin-not-a-
bitcoin-when-its-an-asset-says-g-20/

QUESTION 1
The three roles of money are it serves as a medium of exchange, as a store of value, and as a unit of
account. Then why bitcoin is not considered as money/currencies by the G-20 ministers?

The preliminary G-20 declaration emphasises the shared perspective of ministers that cryptocurrencies,
such as Bitcoin, lack the fundamental attributes of official currencies. This scepticism is based on the
notion that cryptocurrencies are inadequate in efficiently fulfilling the three essential roles of money in
an economy, as delineated by Haksar and Bouveret (2018). This judgement is impacted by the intrinsic
volatility of cryptocurrencies, their limited utility in day-to-day transactions, and vulnerability to excessive
speculation.

Three primary functions of money

i. Currency.
Essentially, money functions as a means of trade, enabling the purchase and sale of
commodities and services. It offers a widely recognised medium for trade, obviating the
necessity of barter systems. Nevertheless, the G-20 ministers contend that cryptocurrencies,
such as Bitcoin, have yet to establish themselves as dependable means of conducting
transactions, primarily because of their limited utilisation in everyday exchanges.

ii. Medium of exchange.

The function of money as a medium for storing value allows individuals to amass wealth for
future utilisation. A dependable repository of worth maintains the ability of money to retain its
purchasing power, enabling the accumulation of savings and the postponement of spending.
However, the high level of unpredictability associated with cryptocurrencies, especially
Bitcoin, presents a major challenge to their ability to serve as a reliable means of preserving
wealth.

iii. Monetary unit used to measure and express the value of goods, services, and financial
transactions.
Money serves as a universally accepted metric for assessing the worth of commodities and
services, hence facilitating economic computations and exchanges. Prices are denominated
in a specific currency, facilitating convenient comparison of the relative worth of various
things. Nevertheless, the G-20 ministers argue that the unpredictable characteristics of
cryptocurrencies render them inappropriate as a universally accepted measure of value.

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Obstacles to the use of cryptocurrencies as a form of currency:

i. Instability.
Bitcoin and other cryptocurrencies are well-known for their price volatility, which undermines
their stability as a unit of measurement and a means of preserving value. The volatile and
erratic changes impede individuals from reliably utilising cryptocurrencies in day-to-day
transactions or as a dependable method to safeguard riches.

ii. Restricted Approval.

Although cryptocurrencies, such as Bitcoin, are increasingly being acknowledged, they
continue to face opposition as a means of conducting transactions. The hesitancy exhibited
by numerous enterprises and individuals in embracing these digital assets limits their
pragmatic application in everyday interactions.

iii. Costs associated with production and the amount of energy consumed
Mining Bitcoin involves significant utilisation of computer power and energy, in contrast to the
modest expenses associated with producing standard fiat currencies. The environmental
consequences and exorbitant production expenses can hinder the extensive acceptance of
cryptocurrencies.

iv. Absence of a central governing body.

Some individuals perceive the absence of central bank control in Bitcoin as a beneficial
aspect due to its decentralised structure. Nevertheless, the lack of a central authority or
official endorsement gives rise to apprehensions over the dependence on user trust, which
could impede the wider adoption.

Although cryptocurrencies possess distinct attributes and potential benefits, their present incapacity to
complete all three monetary functions is apparent. In order for cryptocurrencies to achieve wider
recognition as conventional forms of currency, they must confront substantial obstacles including as
volatility, restricted adoption, production expenses, and the absence of a central governing body. The
scepticism of the G-20 ministers demonstrates a careful attitude, highlighting the necessity for more
assessment and possible regulatory actions to guarantee the stability and dependability of
cryptocurrencies in the worldwide economic environment.

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QUESTION 2
If Bitcoin is considered as an asset and it is potentially be subjected to capital gains tax. How do the G-
20 countries going to manage this? How will the G-20 countries-imposed tax to the Bitcoin owners?

According to the OECD report titled "Crypto-Asset Reporting Framework and Amendments to the
Common Reporting Standard" published in 2022, the document addresses matters related to crypto-
assets and reporting standards. The report is issued by the Organisation for Economic Co-operation
and Development (OECD) based in Paris. https://www.oecd.org/tax/exchange-of-tax-
information/crypto-asset-reporting-framework-and-amendments-to- the-common-reporting-
standard.htm

The G20 nations, in partnership with the Organisation for Economic Co-operation and Development
(OECD), have made substantial progress in tackling the tax ramifications linked to crypto-assets, such
as the extensively utilised Bitcoin. The collective endeavour has led to the creation of the Crypto-Asset
Reporting Framework (CARF), an extensive endeavour designed to enhance worldwide tax
transparency.

The OECD, in collaboration with G20 countries, has created the Crypto-Asset Reporting Framework
(CARF) to address the issue of decreased visibility of tax-related activities in the crypto-asset sector.
This lack of visibility has the potential to erode recent progress in global tax transparency. This
specialised framework is created to streamline the automated sharing of tax information related to
transactions involving crypto-assets on a yearly basis with the taxpayers' respective residential
jurisdictions.

The CARF comprises regulations and explanatory notes that can be smoothly incorporated into national
legislation. These rules grant tax authorities the authority to gather and share information from
Reporting Crypto-Asset Service Providers who are connected to the country that is implementing the
CARF. The framework is centred on four key elements: the range of crypto-assets covered, the
identification of entities and individuals subject to data collection and reporting obligations, the types of
transactions subject to reporting, and the due diligence procedures for identifying users of crypto-assets
and controlling individuals. Furthermore, the framework deals with the identification of pertinent tax
jurisdictions for the purpose of reporting and exchanging information.

The adoption of the CARF by tax authorities aims to improve their ability to monitor tax-related activity
in the crypto-asset industry. This proactive strategy aims to reduce the risk of losing recent progress in
global tax transparency by successfully managing the tax consequences of crypto-assets worldwide.

The tax treatment of Bitcoin and other crypto-assets differs among nations. Nevertheless, in numerous
G20 nations, Bitcoin ownership and transactions are liable to taxation, usually following a similar
approach to the taxation of conventional assets like stocks or real estate. Capital gains tax is a major

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type of taxes that applies to Bitcoin. It is imposed on the profits obtained from selling or exchanging
Bitcoin. Furthermore, tax responsibilities may also apply to activities such as bitcoin mining and other
transactions related to crypto-assets. It is important to acknowledge that the regulatory environment
concerning crypto-assets is always changing, with tax laws and regulations consistently developing.
Therefore, individuals involved in owning or trading Bitcoin should consult tax experts or appropriate
authorities in their local regions to ensure adherence to tax responsibilities for cryptocurrency holdings.
Given the intricate nature of taxing crypto-assets within the worldwide regulatory framework, adopting
a proactive strategy is crucial.

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QUESTION 3
How and why the rapid growth of cryptocurrencies such as Bitcoin may one day be a threat to the
financial system?

The task of creating a global regulatory framework for the cryptocurrency industry is difficult because
of the unique and complex characteristics of the technology. Nevertheless, there are some possible
measures that can be used to negotiate these intricacies and promote efficient global regulation.

i. International Collaboration: Nations can strategically cooperate to exchange information and

adopt optimal methods in the regulation of cryptocurrencies. Forums like the G-20 create a
favourable setting for talks and coordination, promoting a shared comprehension of the
technology's ramifications.
ii. Standardization: Efforts should focus on harmonising regulatory procedures globally. This
may entail the establishment of shared definitions, norms, and rules to synchronise the
handling of cryptocurrencies on a worldwide scale and improve regulatory uniformity.
iii. Regulatory bodies: Countries should contemplate the establishment or improvement of
specialised regulatory bodies with the explicit responsibility of supervising the cryptocurrency
business. These entities have the ability to cooperate in order to tackle issues that span
across borders and establish harmonised methods of regulation.
iv. Enhancing Technology Awareness: It is imperative for governments to allocate resources
towards educating regulatory authorities on the intricacies of blockchain technology and
cryptocurrencies. The primary objective of this educational endeavour is to provide regulators
with the necessary knowledge to make well-informed decisions, hence promoting a regulatory
environment that is more sophisticated and efficient.
v. Industry Engagement: It is crucial to involve bitcoin industry stakeholders in the regulatory
process. By engaging important stakeholders, regulators can acquire useful perspectives on
the distinctive features of the technology, thus ensuring that rules are equitable and mindful of
the industry's dynamics.

In conclusion, establishing an international regulatory framework for the cryptocurrency business is

undeniably difficult. However, the strategies mentioned can provide guidance to countries in dealing
with these issues. Maintaining equilibrium between promoting innovation and mitigating potential
hazards is essential for guaranteeing the enduring stability and soundness of the worldwide financial
system.

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QUESTION 4
Countries are keen to set up an international regulatory framework while the crypto industry is still in its
early stages. How can this be achieved since this is a new technology and not many are well verse
about it?

The establishment of a global regulatory framework for the cryptocurrency business, particularly
during its initial phases, poses numerous difficulties owing to the innovative and intricate
characteristics of the technology. Nevertheless, there exist other tactics that can be utilised to
accomplish this objective as per OECD report titled "Crypto-Asset Reporting Framework and
Amendments to the Common Reporting Standard" published in 2022:

i. Cooperation and Exchange of Information: Nations have the opportunity to cooperate through
global institutions like the G20 and the Financial Stability Board, in order to exchange
knowledge, exemplary methods, and regulatory strategies. Engaging in this process can
facilitate the development of a shared comprehension of the technology and its
consequences, so enabling more knowledgeable regulatory determinations.

ii. Expert Consultation: Collaborating with specialists in the domains of blockchain technology,
encryption, and digital assets can offer regulators unique perspectives to enhance their
comprehension of the technical intricacies of cryptocurrencies. This can aid in the
development of laws that are simultaneously efficacious and technologically robust.

iii. Pilot Programmes and Sandboxes: By implementing pilot programmes and regulatory
sandboxes, authorities can closely monitor the operations of crypto-related enterprises inside
a regulated setting. Adopting this practical approach can offer regulators valuable insights
and data to guide the formulation of suitable regulations.

iv. Ongoing Education and Adjustment: Due to the fast-paced development of the cryptocurrency
business, authorities should embrace a mentality of constant learning and adjustment. This
may entail the creation of specialised departments or task forces dedicated to monitoring
advancements in the cryptocurrency industry and revising rules accordingly.

v. Developing worldwide standards and guidelines for regulating cryptocurrencies can establish
a shared foundation for governments to harmonise their regulatory approaches. The Financial
Action Task Force (FATF) and similar organisations have a vital function in establishing
worldwide benchmarks for combating money laundering and financing of terrorism in relation
to crypto-assets.

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 vi. Public-Private Partnerships: Cooperation among governments, regulatory organisations, and
the private sector can enable the transfer of knowledge and skills. Interacting with industry
stakeholders can provide regulators with valuable information about the practical
consequences of legislation and current business trends.

Establishing an international regulatory framework for the crypto business is undeniably difficult.
However, employing these tactics can assist governments in effectively managing the complexity of
regulating a swiftly changing and inventive technological environment. Regulators must carefully
manage the competing goals of promoting innovation and mitigating possible risks in order to maintain
the enduring stability and integrity of the financial system.

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QUESTION 5
Consumers are using Bitcoin to evade tax. How will this affect the government income and how will the
government track tax evasion in the future?

Baer, K., de Mooij, R., Hebous, S., and Keen, M. (2023). Taxation of cryptocurrencies. The IMF Working
Paper, WP/23/144, published by the Fiscal Affairs Department, states that the utilisation of Bitcoin and
other cryptocurrencies as a means to evade taxes can have substantial consequences for government
revenue. Tax evasion diminishes the government's revenue, hence affecting public services and the
development of infrastructure. In order to tackle this problem, governments are investigating several
approaches to monitor and counteract tax evasion associated with cryptocurrency.

One approach involves imposing legal requirements on businesses to report large cryptocurrency
transactions. This can serve as a red flag for potential tax evasion, providing clues for audit and
increasing the risks associated with non-compliance. Additionally, efforts to highlight tax obligations on
crypto transactions and targeted enforcement by tax authorities can influence compliance behavior.

Moreover, endeavours to emphasise tax responsibilities regarding cryptocurrency transactions and

focused enforcement by tax authorities can impact individuals' adherence to regulations. Moreover, the
significant price fluctuations of cryptocurrencies and the varying risks of fraud or theft linked to their
utilisation can dissuade tax evaders, prompting them to liquidate their holdings at a faster rate compared
to those who retain them for investment purposes. Nevertheless, the precise magnitude of tax evasion
facilitated by cryptocurrencies remains uncertain, and continuing study is being conducted to assess
the scope of evaded taxes.

To summarise, the government's capacity to monitor tax evasion associated with cryptocurrencies is
developing, utilising methods such as transaction reporting mandates and focused enforcement
initiatives to tackle this issue. As the cryptocurrency industry and its regulation evolve, policymakers
and tax authorities are expected to adjust their approaches to prevent tax evasion and maintain the
credibility of tax systems.

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