Is India about to miss the bus in leveraging cryptocurrency?
When India’s Covid-19 pandemic was raging towards its peak in mid-May, Vitalik Buterin, the 27-year-old founder of Ethereum, donated cryptocurrency worth $1 billion to support pandemic relief work in India.
Opportunities offered by Cryptocurrency
- Easily withstand economic shocks: The “cryptomarket” grew by over 500 per cent, even while the pandemic unleashed global economic carnage not seen since the Great Depression.
- Within two days of the China-provoked crash, the value of the cryptomarket again recovered by over 10 per cent.
- Increase in efficiency and transparency: The intermediaries (including banks, credit card and payment gateways) draw almost 3 per cent from the total global economic output of over $100 trillion, as fees for their services.
- The integration of blockchain into these sectors could result in hundreds of billions of dollars in savings.
- The blockchain could make every aspect of e-governance, judicial and electoral processes more efficient and transparent.
- Support to global tech firms: The tech firms, including titans like Google and Facebook, derive most of their value from their multitude of users.
- The blockchain could enable these internet customers to receive micro-payments for any original data they share in the digital space including ratings, reviews, and images.
- Cryptos go mainstream with widespread applications: The applications of blockchain include its use in ‘regtech’ for regulators to capture and store data, in automated risk management, and for the facilitation of regulatory reporting as well as supervisory processes.
- Helping hand towards success in Digital India Programme: The proportionate, proactive, participative and process-driven regulation of cryptocurrencies will aid the success of Digital India.
Challenges associated with Cryptocurrency
- Sceptical about the very idea of crypto-currency: In India, the reflex action is to bar what you can’t understand and ban what you can’t control.
- The law enforcement and taxation agencies have clamoured for a ban, expressing wariness of these being used as instruments for illicit activities, including money laundering and terror funding.
- Lack of government support to tech firms: The funds that have gone into the Indian blockchain start-ups are less than 0.2 per cent of the amount the sector raised globally.
- The current central government approach makes it near-impossible for entrepreneurs and investors to acquire much economic benefit.
- Lack of backing by a tangible asset: It means they may have no intrinsic value from a traditional perspective, but a virtual market value.
- Their price discovery is in uncharted territory, which heightens the risk of market manipulation and has implications for consumer protection.
- Threat to system stability: The cryptocurrency raise concerns of information asymmetry, hacking vulnerability and fire sales.
- Lack of legalization: They are purely digital products, and our authorities are not geared to handle this advanced technology.
- The dgital currency is a decentralized virtual entity that is why the lack of legislation regulating these digital currencies and providing any sort of user protection has become a huge challenge.
- Technology is still immature: The interoperability or the ability of computer system software to exchange and utilize information is a challenge faced by Blockchain.
- The technology has been divided to make multiple uses of it in different industrial domains, separate form cryptocurrency.
Measures to be adopted to grab the opportunities from cryptocurrency
- Regulation of cryptocurrencies by authorities: It 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.
- It needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
- Private blockchain-supported digital currency: The Reserve Bank has announced the launch of a private blockchain-supported official digital currency, similar to the digital Yuan.
- Any policy, legislative or regulatory approach to private cryptocurrencies must embody the principles or proportionality and proactiveness.
- A regulatory strategy for cryptos must not be excessive, but oriented towards mitigating the specific risks they present.
- Testing of Private cryptos in a controlled environment: The private cryptos can be tested in a controlled environment, such as a regulatory sandbox or RBI’s Innovation Hub.
- It would allow the experimentation not only for market participants, but for regulators as well.
- It will allow policymakers to examine and monitor crypto applications and provide an iterative learning process through which more robust regulations could evolve.
- Regulation and acceptance of cryptos can be done in two stages: A central bank digital currency (CBDC) can mark the start of India’s journey into the world of digital currencies, but must not be an end in itself.
- The private cryptos may well be sustainable under regulation and could also help the government and central bank meet key policy objectives.
Road ahead
- The government must bring new regulations for the blockchain sector which should prevent the misuse of these digital assets without hindering innovation and investments.
- India was a late adopter in all the previous phases of the digital revolution when semiconductors, the internet and smartphones made their mark, we had to play catch-up, as we are still doing on 4G and 5G.
- India has the potential to channel its human capital, expertise and resources into the digital currency revolution, and emerge as one of the winners of this wave.
- India needs a well-conceived regulatory framework that facilitates transparency, and the responsible democratization of market participants could guard against digital invasion and coercive behaviour.
- The public-policy objectives can be addressed through micro and macro prudential regulation of private digital tokens, with an eye kept on market conduct, data privacy and operational resilience.
- India has a chance to be a global leader in framing the regulatory architecture for a new digital world and the democratized and appropriately-regulated use of cryptocurrencies is an opportunity that the country must seize.
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