Cryptos: From banning to regulating disruptors

Mahesh Kumar, a restaurant manager, lost his job in the first wave of the pandemic last year. Even as the father of two has been trying to get another job ever since, he began investing in cryptocurrencies to earn some income. The returns, he said, are much higher than he expected.

Kumar is not alone. Over the last one-and-a-half years, after the ban on crypto trading was lifted by the Supreme Court in March 2020, several Indians have steadily started trading with exchanges reporting huge amount of investor interest.

Cryptocurrency exchanges said at least 95 per cent of their customers are like Kumar, who are just investors and do not have any criminal intent.

However, the sector remains a grey area in terms of regulations.

It continues to thrive with robust trading in cryptocurrencies as well as a large number of companies setting up shop, though the Reserve Bank of India (RBI) has time and again highlighted its concerns over cryptocurrency.

“When the RBI, after internal deliberation, says there are serious concerns on macro economic and financial stability, there are deeper issues, which need much deeper discussions and much more well informed discussions,” RBI Governor, Shaktikanta Das, had said in November.

Many banks in the country, too, have been cautious in extending support to cryptocurrency traders and investors.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is expected to be tabled in the ongoing Winter Session of Parliament is expected to bring some much needed clarity. While apprehensions continue over a possible banning of cryptocurrency trading in the country, leading to some amount of panic selling by investors, discussions now seem to focus more on regulation, especially for investor protection.

Most stakeholders and experts say cryptos should be regulated as an asset class and not be considered legal tender.

Finance Minister Nirmala Sitharaman has so far, not divulged the contours of the proposed Bill but has said it will take into consideration the rapidly changing dimensions in the virtual currency space.

“Cryptocurrency needs to be regulated in India with a proper framework, rather than arbitrarily being banned. Crypto is a very different asset class since there is no underlying fundamental value besides demand and supply, much like any other collectible such as stamps or jewellery,” said Raja Gopalakrishnan, Executive Vice President – Global Real Time Payments, FIS.

Asset class

The digital rupee is a very welcome step, and will play a big role in driving India into the digital age of innovation, with multiple benefits over traditional physical currency, he further said.

“A crypto asset is a digital asset that relies on decentralised ledger technologies such as blockchain technology to secure, validate, and record transactions. Cryptocurrencies can operate as a unit of account, medium of exchange, or a store of value,” a recent report by Esya Centre and Observer Research Foundation stated.

Manhar Garegrat, Executive Director – Policy and Special Projects at CoinDCX, pointed out that most countries are not looking to recognise cryptocurrencies as legal tender and they want to maintain the sovereignty of their currencies.

“Even in India, we do not want to look at cryptocurrency as legal tender. But there are various other use cases and utilities of crypto which can be encouraged and allowed within certain boundaries,” Garegrat said.

“The fact that the word ‘currency’ is in the name of cryptocurrency is very misleading. There are many different layers of blockchain technology and bitcoin is just one of these layers,” said Kristin Boggiano, Co-founder and President of CrossTower.

“We hope for a reasonable approach in the Bill that provides for a regulatory framework taking into consideration the technological changes and protects customers from bad actors,” she added.

The use of blockchain technology on which cryptocurrencies ride must also be promoted, opined experts, in order to ensure the country’s competitiveness globally.

But cryptocurrency continues to be an evolving subject across the world.

While there is no clarity on how the US plans to recognise cryptocurrencies, Japan has clearly said it does not recognise them as legal tender, Garegrat said, while also noting that there have been a lot of developments around payment use case in cryptocurrency.

Others like China have banned crypto trading while El Salvador has recognised Bitcoin as its global tender.

Investor protection

Need for common regulations and investor protection are issues that all stakeholders agree need to be looked into and hope that the Bill will provide.

The slew of ads during recent cricketing events by cryptocurrency exchanges raised concerns over lack of awareness while the mushrooming of a large number of players in the crypto space has also highlighted the need to regulate the sector.

There are at least 350 companies operating in the sector in the country and offer various services that are not only restricted to trading but also offer facilities like savings products. Many of these companies are also looking to set up physical branches.

Most exchanges already have a self regulation code where they ensure KYC of customers and AML compliances on the lines of those followed by other regulated financial entities.

The report by Esya Centre and Observer Research Foundation highlighted that the Indian crypto asset industry has grown exponentially over the last five years and cryptocurrencies, like any other financial asset, need to be regulated to both protect consumer welfare and promote innovation.

The report on Regulating Crypto Assets in India has recommended introduction of investor protection norms that are similar to SEBI’s disclosure-based frameworks, regulation of crypto asset ads through a framework similar to money market mutual funds as provided under the sixth schedule of the Mutual Fund Regulation and establishing minimum security standards for crypto asset service providers.

Regulator

Questions remain about who would regulate crypto assets with the RBI clearly not in favour of them. A possible solution could be market regulator SEBI. Some industry players have called for a separate regulator while yet others believe that GIFT authority may be given powers to regulate the sector.

The proposed Bill is expected to spell out the regulatory framework for the cryptocurrency sector along with KYC and anti-money laundering provisions.

A clear framework on tax treatment, rather than patchwork clarifications will also bring the sector under better regulation, create transparency and greater disclosures as well as help the exchequer earn greater revenue.