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We need smart regulation to unlock the true potential of crypto assets

Cryptocurrency is a form of payment that can be exchanged online for goods and services. It is a form of digital asset based on a network that is distributed across a large number of computers. It works using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. 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. To understand why, let’s take one oft touted benefit of crypto assets—that they make 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. There are 45,000 chit funds (and many more unregistered ones). These chit funds are the world’s largest decentralized finance applications. Crypto can’t match that scale. So, 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. Domestic crypto markets in India and the global opportunities are synergistic. 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. Creative ‘crypto export zone’ schemes can incubate clusters of excellence and create world-class financial services firms and unicorns.
Gain optionality on 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. Next, let’s consider the regulatory perspective. India’s financial sector regulation tends to be conservative, and that’s a good thing. This same conservatism helped Indian financial institutions weather the Global Financial Crisis of 2008 better than many western firms. And, there are three key regulatory concerns about crypto assets. 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 misselling and other safeguards are needed. Crypto assets are now better understood as digital assets, instead of as digital currencies. Regulating them like commodities and clarifying their tax treatment is a win-win. The government’s tax revenues go up. 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 capital markets. Crypto assets may be used to avoid capital controls. That’s a potential risk to macroeconomic stability. If crypto holders have to declare their holdings above a particular level in their tax forms, such concerns can be mitigated.

In summary, a smart regulatory approach considers both the potential upside and downside. It fosters financial innovation, safeguards investors and unshackles the Indian crypto ecosystem.


POSTED ON 21-10-2021 BY ADMIN
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