Regulate crypto or Ban it: The Future of cryptocurrency in India and crypto regulations entail

The Supreme court pulled up our policy makers for the lack of any transparency and clarity around crypto. This, despite India presenting regulatory frameworks for Cryptocurrency in their G20 Presidency. So, what do our policy makers really think of decentralised digital currency? And will they be able to table a bill to regulate it before the 2024 elections? More importantly, what will this mean for the Indian Crypto Community? The Fintech Chronicler finds out.

------------------------------------------------------------------------------------------------------

According to reports from July 27, the Indian Supreme Court issued a scathing critique of the Union government for its lack of crypto regulations, calling it out as "Unfortunate". The court has ordered the Union administration to declare whether or not it intends to establish a federal body to investigate crypto-related offences.

The announcement came while the court was hearing petitions in multiple states of India regarding bitcoin fraud. Uniform crypto rules in India have been difficult to develop. The United States Supreme Court ordered Congress to develop cryptocurrency legislation backin 2018. Despite assurances stretching back five years, the administration has yet to determine which body, CTFC or SEC is to take up the onus let alone introduce the crypto bill.

And in India with the Election season comingup in 2024, will the current office bearers table a bill in time? And what will that mean for the Indian Crypto community? This edition of the Fintech Chronicler intends to investigate just that.

What is Cryptocurrency?

Cryptocurrencies are encrypted digital currency. They enable secure, third-party-free internet payments. Cryptography prevents counterfeiting and double-spending of cryptocurrencies.

Blockchain technology—a distributed ledger enforced by a distributed network of computers—powers most cryptocurrencies. Blockchains are online ledgers with connected chunks of data. Each block contains transactions validated by each network validator. Verifying every new block before confirming it makes transaction history forgery nearly impossible

Cryptocurrencies are not issued by a central body, making them potentially impervious to government manipulation.

There are different kinds of crypto currencies, each with a unique set of utiity.

1.      Utility tokens: XRP and ETH. They have specific blockchain functions, like trading rare digital items, or contracts between 2 parties.

2.      Transactional: Payment tokens. Bitcoin is most famous.

3.      Governance: Blockchain coins like Uniswap reflect voting or other rights.

4.      Platform: These coins support blockchain applications like Solana.

5.      Security tokens: Tokens indicating stock ownership that have been tokenized (value moved to the blockchain). MS Token is securitized. If you can buy one, you can own part of the Millenium Sapphire.

If you want a full break down of what crypto is, the different kinds of cryptocurrencies, how they operate, their role int eh financial ecosystem etc, I recommend an older article of mine from late last year. Click here to read it.

What role does crypto play in Financial Services?

Financial inclusion is essential for economic progress. Unfortunately, many people, especially in developing nations, lack basic banking services. The World Bank estimates that 1.4 billion adults lack these services, limiting economic prospects and perpetuating poverty.

This is a problem Cryptocurrnecies want to solve. Cryptocurrencies are stored and transferred digitally without banking infrastructure. This allows people in remote or underserved locations to utilise cryptocurrency without a bank branch, giving an alternative for those who may not have access to regular banking or desire anonymity.

Cryptocurrency offers more than banking services. Cryptocurrency can streamline cross-border payments for migrant workers sending money home. It also allows users to access loans, savings, and insurance without intermediaries, making it cheaper.

Cryptocurrency's decentralised ledger can improve financial transparency and eliminate corruption, increasing worldwide trust in financial systems. Smart contracts automate financial agreements and eliminate intermediaries.

Decentralised finance (DeFi) platforms can be created using blockchain technology. These blockchain-based systems give users direct access to financial services, allowing them more control over their finances. Financial education can benefit from cryptocurrency and blockchain technology. Digital financial services make financial management and investing safe and accessible. These technologies can empower people financially.

Cryptocurrency and blockchain technology can offer alternative financial services like peer-to-peer lending. This can help underbanked people access financial services, reducing poverty and increasing economic opportunity.

But not everyone agrees with that dream of cryptocurrencies. The biggest dissent are the voice of regulators. And not justin India, but across the globe.

FSB , IMF and Crypto Stability report

Recently global agencies, International Monetary fund, World Economic Forum and Financial Stability Board, all came up with their own versions on how and why crypto I sto be regulated. And since most nations taking policy counsel from these agencies, I thought I’d ready through pages of their reports. What I found was, well kinda terrifying to be honest.

FSB report starts off by reiterating their 3 tenets

1.      Same activity, same risk, same regulation: The Financial Stability Board (FSB) proposes regulating global stablecoin and crypto-asset operations according to their financial stability concerns. Regardless of how crypto-asset activities are conducted or advertised, regulatory frameworks should ensure that cryptoasset activities that aspire to fulfil an analogous economic function to one in the traditional financial system are regulated similarly.

2.      High Level and flexible: The FSB's recommendations are wide enough for jurisdictional authorities to apply current regulations or create new ones to fit their markets. This strategy also allows SSBs to create precise standards that address industry-specific issues within their mandates.

3.      Technology Neutral: The FSB's stablecoin and crypto-asset risk mitigation guidelines are intended to apply to all technologies. The economic purposes and risks of crypto-asset activities should drive legislation, not the technologies.

Basically, anything which the government does not like, or understand ! To read the full report, click here.

And as a next step, the IMF and FSB wil introduce a shared regulatory framework, to help countries bring crypto under regulation.  

Crypto adoption in India

In 2021, Parliament's Winter Session was supposed to pass the Cryptocurrency Bill, but it didn't.Probably why the supreme raised these questions to them recently.

How is the Cryptocurrency Bill doing? When will it be tabled for input? Which ministry/department will oversee virtual assets like cryptocurrencies, NFTs, decentralised applications, real estate tokens, and others?

"Crypto assets are by definition borderless and require international collaboration to prevent regulatory arbitrage," said Minister of State Finance Shri Pankaj Chaudhary. Therefore, any law on the subject can only be effective with major international collaboration on risk and benefit evaluation and evolution of common taxonomy and standards.” He noted that the Ministry of Finance manages policy-related ecosystems and crypto assets.

This statement had a strong reaction amongst the 7th largest country in terms of global crypto adoption

Part of the reason could be because a majority of Indian crupto investors, are between he age 18-34. The typical age where you are more willing to take risky bets, and wait for them to pay off.

Also, this age group is kind of a maverick. They (self included) don’t believe in traditional modes of investing, find Gold to be boring, and think real estate to be a sunck cost in terms of investment ROI.

Crypto however has its appeal, thanks to the high CAGR over the last 10 years.

And theyre not alone.

Crypto adoption across the globe

However, one segment that seems to be behind in terms of crypto adotion are women. Only 15% of women world wide invest in crypto. And If I start getting into the “WHY” of that this will become an increasingly digressing newsletter. So lets look at where other countries are in terms of crypto adoption.

EU Blockchain Sandbox and crypto regulations

European union definitely is ahead of the curve, with the regulators etting up sandboxes for crypto startups to buold new and innovatinve financial products. Once these sandboxes have a working prototype a pilot is run. To determine the feasibility of these projects. Making Europe the most welcoming, innovative and regulated crypto markets.

El Salvador crypto adoption

And then we have another kind of country, where cryptocurrencies are given the same stature as their regular currency. Like El Salvador. Who announced Bitocin to be a legal tender.

Now, why would a government do that?

Well, for El Salvador it was an easy decision. They any way did not have control over their monetary policy, considering tht the most use legal tender was US Dollars. Andi guess it makes sense for them to use a decentralised currency which cannot be controlled ny one entity?

However, ask the locals, and theyd tell you most of them do not use Bitcoin to purchase every day items. At least not yet.

Who regulates Crypto : USA

And talking about Crypto regulations would be incomplete without a reference to US. For obvious reasons.

For one, the lack of clarity has so many crypto startups moving out. That the country seems to be at risk of losing its edge as the hub for innovation.

And then we have 3 different regulators, all claiming they have jurisdiction over crypto regulation, but none of them having any clear answers on why certain events were let to happen under their watch.

Honestly, both the SEC and CTFC senate hearings were painful to watch, after FTX and Terra-LUN collapses respectively.

CFTC , digital asset, and regulations

In fact in the wake of FTX bankruptcy, the chair of Commodities and Futures Trading Commission (CFTC), Rostin Behnam,  urged policy makers to provide clarity about crypto jurisdiction. Because he believes Cryptos are nothing but digital assets, and as such CFTC should be the one to regulate it.

Behnam said the CFTC cannot register cash market exchanges, which limits it. That worries me. "This gap exists," he told legislators. "If we don't do anything, customers will lose money and we'll be back here in a couple months."

He also spoke of his 10-minutes meeting with Sam Bankman Fried of FTX, and his repeated communications to discuss the company's application to directly clear consumer trades. He stated that the CFTC had no legal power or visibility into FTX's other businesses.

Behnam requested increased congressional authority to control the agency's digital assets during Thursday's session. The CFTC can prosecute fraud and misconduct in futures markets dominated by big participants like money managers, but it cannot regulate spot markets.

"The CFTC has many tools at its disposal to try to make defrauded customers whole, but the process is long and arduous, and sometimes there is no way to return all of what was lost," Behnam added.

Gary Gensler says all Cryptos are unregistered Securities

Menawhile, Gary Gensler, the Head of Securities and Exchange Commission, believes all crypto except bitcoin are securities. Even if they do not pass the Howie test for securities.

SEC vs Ripple and what the court ruling means for who will regulate Crypto

The courts however do not agree. As we read, recently with their rulings on the Ripple case.

Is XRP a securities or not is a longer discussion, one you can read from here.

India's Regulatory Framework, and who should regulate crypto

And all this brings us back to India. And to the question, what should Indian Policymakers do?

Lets first take a look at what our Finance Minster, hon. Nirmala Sitharaman had to say abut crypto, an archive from a year back, where she said Crypto is no currency because it isn’t issued by the RBI.

While the Indian government has yet to issue crypto guidelines, it quickly passed crypto taxes regulations in April 2022, in an effort to curb its adoption in the country. The law was first enacted during the bull market, when India top 4 crypto marketplaces with several crypto unicorns and billions of dollars in trading volumes. However, the tax regulations had a big influence on the developing crypto business as most established firms left India due to legal uncertainty.

This makes me feel like the government is scared of the impact of cyrpto, and wishes it gone! But I strongly believe that the future is one where both Central bank digital currencies coexists with decentralised cryptocurrencies. Simply because they solve 2 different painpoints for people.

And yes, having regulations helps. Because then the innovators know the boundaries they can operate within. And it gives confidence to the end consumer to know that someone out there is looking out for their safety.

But can the government afford to delay anymore? India has made significant progress in being recognised as a Fintech Superpower. A position that many others, like Singapore, Dubai, European Union are vying for. So, given that these nations are being seen as crypto friendly, do we stand the chance of our innovators moving out of the country?