India Must Regulate Cryptocurrencies to Promote Innovation: Experts

A new report highlights that crypto-assets are likely to form the basis for future forms of the internet and that India is well placed to capitalize on this due to its burgeoning private crypto market. Given this, it would be unwise to place a ban on private crypto assets as these can result in significant revenue loss to the government and force nascent industries to operate illegally, says the report authors.

The report titled: ‘Regulating Crypto Assets in India’, jointly published by the Esya Centre and Observer Research Foundation, comes at a time when the Central government aims to introduce a bill to regulate the asset.

The Indian Crypto asset industry has witnessed exponential growth over the last five years. Analysts suggest that more than 15 million Indians now hold digital currencies. As a result, cryptocurrencies, like any other financial asset, need to be regulated to both protect consumer welfare as well as promote innovation. The report throws light on crypto assets as a technology and makes recommendations for the regulation of the Indian crypto asset market.

Instead of a ban, the report authors Meghna Bal, Shweta Venkatesan and Varun Ramdas, advocates a balanced regulatory approach that addresses concerns of fiscal stability, money laundering, investor protection and regulatory certainty while preserving innovation.

Like all financial assets, crypto assets pose certain policy risks that must be addressed through a coherent framework that balances the public interest with the need to encourage innovation. According to the authors, there is a need to adopt a co-regulatory approach where SEBI, the RBI, and the Ministry of Finance, and a crypto asset service providers industry association work together to oversee and regulate the Indian crypto market. Industry experts can devise codes for oversight which are affirmed and backed by the SEBI, the RBI, and the Ministry of Finance, and implemented and enforced by an industry body.

The report authors define crypto assets under one framework which will help avoid jurisdictional clashes between different regulators. A crypto asset means an asset that is created and conveyed using any distributed ledger technology and is not legal tender and may not be used for payments within the Union and may be used as a representation and/or of value, means of exchange, or a unit of account or be representative of financial interest and rights.

According to the report co-author, Meghna Bal, “The most regulatory formulae necessary to address the policy concerns related to crypto-assets, such as investor protection, foreign exchange management, money-laundering and tax evasion, already exist in financial legislation. They just have to be adapted to accommodate an emerging technological paradigm. The recommendations in our report show how this can be done. ”

Towards this end, the report recommends the induction of a safe harbor for crypto assets, similar to the one inducted for internet intermediaries in the Information Technology Act, 2000 and the Copyright Act, 1957. The size of first-generation internet technology companies today is testament to the enabling power of safe harbors as a tool to promote innovation. If the crypto asset space presents the future of the internet, as many experts propound, it is imperative that the crypto industry be afforded the same legal succor that allowed big technology companies to reach where they are today.

The report argues that in India, classifying crypto as a security, good or capital asset could lead to unintended restrictions on investment or leave regulatory gaps in key policy areas. A sui generis crypto framework that adopts the nuances of the crypto industry would be more appropriate and in keeping with emerging global trends.

In an effort to establish regulatory recommendations for India, the authors have carried out an exhaustive study of international regulatory approaches and bucketed them into four categories.

The first approach involves accommodating crypto assets into existing frameworks as they stand. The problem with this approach is that several crypto assets do not fall neatly into the definition of existing financial instruments and therefore fall outside the regulatory ambit.

The second approach is innovation-friendly steps taken by some regulators to encourage startups to set up base within their jurisdictions and help the local crypto industry grow.

The third, according to the report, is crypto-specific legislation or amendments that address the concerns around licensing and registration, definition, tax, money laundering and terror financing, and investor protection. This approach is comprehensive and seems the most practical route and is being adopted by most advanced financial jurisdictions.

The analysis of possible regulatory pathways under existing regulation in India reveals a similar problem. It is likely that most prominent crypto assets such as Bitcoin would not be suitably accommodated as securities, or commodities. While crypto assets may be recognized as capital assets, the frameworks that currently regulate these assets in India would necessarily leave gaps in investor protection and service provider registration.

The analysis of the way crypto markets work, reveals that the industry should be regulated through exchanges. These entities account for the bulk of the volume of activity in most major crypto networks and provide point of entry for most retail and institutional investors into the crypto market. As such, they should serve as designates for regulation around the various policy risks presented by crypto assets.

Such a facilitative regulatory framework will boost the growth of India’s crypto ecosystem while addressing any possible harms to consumers and society at large, the report says.