Regulation of Crypto Assets

Regulation of Crypto Assets

Often touted benefit of crypto assets is that the crypto makes finance more 

inclusive and decentralized. But India already has the world’s largest financial 

inclusion programme in Jan Dhan. In the past seven years, 430 million bank 

accounts have been created for the under-banked. A majority, 55%, of them are 

women. Crypto can’t match the scale of Jan Dhan Yojana in India. 

Moreover, Regulation of crypto assets such as bitcoin and ethereum is a hot topic 

globally. Countries are in various stages of banning, un-banning, re-banning and 

regulating crypto assets. We may take some cues from other countries, but what 

we need is smart regulation that’s made in India.

Reasons For Adoption of Crypto in India :-

 Financial inclusion is not the main reason to embrace crypto assets in India. But there 

are three compelling India-specific reasons to embrace crypto assets. 

 Establish India as an Integral Part of the New Financial Ecosystem: Large global 

financial institutions and investors are adding crypto assets to their portfolios. o 

Finance firms, banks, fintech and crypto startups can tap into the huge growth of the 

industry. Software technology parks (STPs) and special economic zones (SEZs) 

enabled the IT services boom. 

o Creative ‘crypto export zone’ schemes can incubate clusters of excellence and create 

world-class financial services firms and unicorns. 

 Capitalize on New Technology and Services Opportunities: Blockchain 

application development, its scalability, security and analytics are their next growth 

opportunities. To cater to this demand, there is a need for a large talent pool with 

expertise in the crypto tech stacks. 

 Scope of Financial Innovation: There is a burst of technology innovation and 

business models around blockchains. There are several interesting applications, but new killer apps will emerge. The impact of new technologies is overestimated in the 

short term, but underestimated in the long term. 

Key Regulatory Concerns :-

• Investor protections: Investor protection has been a top priority for Indian 

regulators. Crypto assets are seen as high-risk, speculative assets. Investor education, 

guidelines against mis-selling and other safeguards are needed.

o Crypto assets are now better understood as digital assets, instead of as digital 

currencies. 

o Regulating them like commodities and clarifying their tax treatment is a win-win. The 

government’s tax revenues can go up. 

o It can also increase the number of tax filers (only 64 million in FY20) and the number 

of taxpayers (14 million). 

 Sidestepping current regulations: Some crypto assets may allow individuals to 

bypass securities issuance laws. That’s a potential risk to economic stability. o If crypto 

holders have to declare their holdings above a particular level in their tax forms, such 

concerns can be mitigated. 

 Illicit transfers: Anonymous transfers of crypto assets may weaken anti-money 

laundering laws or combating the financing of terrorism rules. That’s a potential 

national security issue. 

Issues Associated with Banning Decentralised 

Cryptocurrencies :-

 Blanket Ban: The intended ban is the essence of the Cryptocurrency and Regulation 

of Official Digital Currency Bill, 2021. It seeks to prohibit all private cryptocurrencies in 

India. 

o However, categorising the cryptocurrencies as public (government-backed) or private 

(owned by an individual) is inaccurate as the cryptocurrencies are decentralised but 

not private. 

o Decentralised cryptocurrencies such as bitcoin aren’t or rather, can’t be controlled by 

any entity, private or public.

 Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both 

talent and business from India, similar to what happened after the RBI’s 2018 ban. 

o Back then, blockchain experts moved to countries where crypto was regulated, such 

as Switzerland, Singapore, Estonia and the US. 

o With a blanket ban, blockchain innovation, which has uses in governance, data 

economy and energy, will come to a halt in India. 

 Deprivation of Transformative Technology: A ban will deprive India, its 

entrepreneurs and citizens of a transformative technology that is being rapidly 

adopted across the world, including by some of the largest enterprises such as Tesla 

and MasterCard. 

 An Unproductive Effort: Banning as opposed to regulating will only create a parallel 

economy, encouraging illegitimate use, defeating the very purpose of the ban. 

o A ban is infeasible as any person can purchase cryptocurrency over the internet. 

 Contradictory Policies: Banning cryptocurrency is inconsistent with the Draft 

National Strategy on Blockchain, 2021 of the Ministry of Electronics and IT (MeitY), 

which hailed blockchain technology as transparent, secure and efficient technology 

that puts a layer of trust over the internet.

Way Forward :-

 Regulation is the Solution: Regulation is needed to prevent serious problems, to 

ensure that cryptocurrencies are not misused, and to protect unsuspecting investors 

from excessive market volatility and possible scams. 

o The regulation needs to be clear, transparent, coherent and animated by a vision of 

what it seeks to achieve. 

 Clarity on Crypto-currency definition: A legal and regulatory framework must first 

define crypto-currencies as securities or other financial instruments under the relevant 

national laws and identify the regulatory authority in charge.

 Strong KYC Norms: Instead of a complete prohibition on cryptocurrencies, the 

government shall rather regulate the trading of cryptocurrencies by including stringent 

KYC norms, reporting and taxability. Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both 

talent and business from India, similar to what happened after the RBI’s 2018 ban. 

o Back then, blockchain experts moved to countries where crypto was regulated, such 

as Switzerland, Singapore, Estonia and the US. 

o With a blanket ban, blockchain innovation, which has uses in governance, data 

economy and energy, will come to a halt in India. 

 Deprivation of Transformative Technology: A ban will deprive India, its 

entrepreneurs and citizens of a transformative technology that is being rapidly 

adopted across the world, including by some of the largest enterprises such as Tesla 

and MasterCard. 

 An Unproductive Effort: Banning as opposed to regulating will only create a parallel 

economy, encouraging illegitimate use, defeating the very purpose of the ban. 

o A ban is infeasible as any person can purchase cryptocurrency over the internet. 

 Contradictory Policies: Banning cryptocurrency is inconsistent with the Draft 

National Strategy on Blockchain, 2021 of the Ministry of Electronics and IT (MeitY), 

which hailed blockchain technology as transparent, secure and efficient technology 

that puts a layer of trust over the internet.

Way Forward :-

 Regulation is the Solution: Regulation is needed to prevent serious problems, to 

ensure that cryptocurrencies are not misused, and to protect unsuspecting investors 

from excessive market volatility and possible scams. 

o The regulation needs to be clear, transparent, coherent and animated by a vision of 

what it seeks to achieve. 

 Clarity on Crypto-currency definition: A legal and regulatory framework must first 

define crypto-currencies as securities or other financial instruments under the relevant 

national laws and identify the regulatory authority in charge.

 Strong KYC Norms: Instead of a complete prohibition on cryptocurrencies, the 

government shall rather regulate the trading of cryptocurrencies by including stringent 

KYC norms, reporting and taxability. Ensuring Transparency: Record keeping, inspections, independent audits, investor 

grievance redressal and dispute resolution may also be considered to address concerns 

around transparency, information availability and consumer protection. 

 Igniting the Entrepreneurial Wave: Cryptocurrencies and Blockchain technology 

can reignite the entrepreneurial wave in India’s startup ecosystem and create job 

opportunities across different levels, from blockchain developers to designers, project 

managers, business analysts, promoters and marketers 

Conclusion :-

In summary, a smart regulatory approach should consider both the potential 

upside and downside. It fosters financial innovation, safeguards investors and 

unshackles the Indian crypto ecosystem.