For several months, my stand on cryptocurrencies, assets and exchanges has been that a comprehensive regulatory framework be built around the Central Bank Digital Currency (CBDC). The government has been listening and accepting most of the suggestions. The challenge of framing regulations for an amorphous sector is that it will evolve and emerge in a new form. This means that some of the definitions have to be open-ended and progressive to incorporate future changes in technology or products, while keeping the interests of citizens, investors and even technological growth in mind.
Crypto Tokens versus Cryptocurrency
This difference is now being accepted in both opinion pieces and general narrative. I have said earlier that only an RBI-mandated digital currency can be called a currency in India. No exchange, marketplace, adviser should sell or buy or facilitate the sale or purchase of any digital token—which I call a Kardashian investment—under the guise that it is a currency.
My stand has also been validated by both the government and the central bank. The Central Bank Digital Currency (CBDC) is the only digital currency that will be termed or defined as such; anyone else terming a digital token as a currency should invite punitive damages under section 420 of the IPC for fraud.
Crypto Tokens as Investment
Now that CBDC as a digital currency debate is settled, sellers of cryptocurrency have changed their tune and have started saying that they are not selling currency but facilitating an investment between peers. They have even stopped using terms like investors but instead are calling the people using their exchanges as ‘users’.
They are also changing the definition of digital tokens to avoid any restrictions even as regulations are being developed. The lobby says digital tokens cannot be classified as security because they do not meet the parameters of inherent security. Hence, the lawyers are again blowing smoke over this by saying it ‘could’ be classified as a commodity. This confusion is part of a lobbying initiative to prevent any form of control or restriction on these tokens by Securities and Exchange Board of India (SEBI). Although both commodities and securities are governed by SEBI. But the confusion helps delay arriving at a clear definition.
The debate whether it falls under securities or commodities is a very old lobbying strategy and has been used in the past by chit funds, Ponzi schemes, plantation companies, and several other players to avoid regulation. Legally, these crypto tokens can be classified as collective investment schemes as their value is based on more and more people investing in it rather than anything inherent.
Another simpler way would be to define it from the perspective of organisations that are involved in facilitating the selling of these tokens or whose platforms are being used for this purpose. Any platform selling or buying or enabling the sale or purchase of crypto tokens needs to be defined as an investment adviser under the SEBI Act. They should follow all the norms that are prescribed for investment advisers including registering as one with SEBI so that they do not promise or advertise unearthly gains.
The advertising norms should not be left to the discretion of advertisers or the Advertising Standards Council of India (ASCI) as the latter does not have authority over managing or restricting advertising that goes on the internet. ASCI has little authority over advertisers using Google, Facebook or Twitter or other publishing platforms. ASCI appeal only runs on traditional advertising agencies and traditional media companies, sometimes only as an advisory.
Hence, the government should not depend on the ASCI to regulate advertising promising gains. Advertising should be part of the investment advisory norms of SEBI Act. This has been done in the past, including for Harshad Mehta when he was writing columns promising huge gains in stocks. It has been used against journalists, anchors of TV shows and several individuals and organisations in the recent past.
Crypto Exchanges Morph into Marketplaces
I have raised this issue in the past that any entity calling itself an exchange has to pass the norms of an exchange. And the only entity that has been successful in regulating exchanges is SEBI. Everyone remembers the fiasco of commodity exchanges including MCX that resulted in a loss to investors and affected growth of markets because it was not governed by SEBI. One of the learnings from the MCX scam was that exchanges need to be governed by SEBI, only they have the regulatory experience to manage them. Hence, entities facilitating selling or buying of crypto tokens need to decide whether they want to register as exchanges or investment advisers. Each has their own advantages. What they cannot do is rename themselves as marketplaces and hide under a new nomenclature.
This renaming, however, has already started. Crypto exchanges are renaming and launching a new company, calling themselves marketplaces for NFTs (Non Fungible Tokens).
NFT is a new way of classification of crypto tokens and is linked to other discreet assets like an artist’s work, a design, or a picture.
These NFTs defined by such digital discrete assets are being converted into tradeable tokens to give liquidity and to transfer ownership and value. This is again an unregulated market and entities enabling them need to follow some rules. Otherwise the second round of advertising blitzkrieg will be about NFTs promising enormous gain and value and once again sucking in gullible investors.
Hence, the terminology of the Bill must take into account that the form of the token is not important. What is important is its function or the purpose it is being used for, like transferring assets and value. Hence, they can be used for money laundering, or by terrorists to send funds too. Restrictions applied on investment advisers over advertising, usage and selling should be applied to crypto marketplaces too.
Crypto exchange’s use of marketplace nomenclature will also create confusion with the market intermediaries rules. There is already a very strong lobby of market intermediaries made up of Big Tech that is following a 3D strategy—deflecting, diluting and defying.
Deflecting, Diluting, Defying and Damaging
So much of venture capital and other funding has flowed into this sector of decentralised finance that it has developed a very sophisticated approach towards lobbying. On Tuesday, during the Parliament Winter Session, several MPs raised questions to Finance Minister Nirmala Sitharaman. One of the questions was about demanding relaxation for NFTs—this is a new approach to protect the turf of these digital tokens. It has to be carefully handled and NFTs should not become the new cover to hide crypto tokens.
The lobby is using the tried-and-tested method of deflecting the impact of all emerging regulations by first diluting them. While their members say on news channels that they want regulation, they are deflecting the thrust of regulations by hiding their businesses under new entities. They will continue to defy the efforts of centralised organisations to regulate them unless the regulations are not drafted from the purpose of usage and not form. The draft also has to be open-ended to allow progressive shift of technology and the emergence of new products promising incorrect gains or options to gullible citizens.
K Yatish Rajawat is a public policy analyst. He tweets @ yatishrajawat. The views expressed in this article are those of the author and do not represent the stand of this publication.
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