A regulatory framework for digital assets in India
India would do well to study legislation enacted across global innovation hubs and create a progressive crypto regulatory framework that fosters domestic entrepreneurship
In January 2009, a still anonymous Satoshi Nakamoto launched a White Paper with a plain, disingenuous title, Bitcoin: A peer-to-peer electronic cash system. It suggested a Blockchain-backed, fully decentralised, electronic system that didn’t need the purview of third-party financial institutions. Nakamoto mined the first 50 Bitcoins, and in 2010, gave the project to the digital community. The price of Bitcoin hovered around a few cents to a few dollars for the next couple of years. It then started a steep climb, with many dips in between. At its peak, it touched $68,000.
Many more crypto coins were released since the inception of Bitcoin. Some of them, including Ethereum and Litecoin, are cumulatively called AtlCoins. They were launched as improvements to Bitcoin, and were envisioned to be mediums of exchange. Many others are “tokens” built on existing blockchains. They are not considered currencies, but are seen as programmable assets that facilitate the creation and execution of digital solutions.
Then, there are Stablecoins, which are cryptocurrencies pegged to reserve assets such as other cryptos, fiat currencies, or commodities. This was meant to absorb price volatility. However, a recent episode where $60 billion of TerraUSD (a payment platform) collapsed overnight, rendered the stability feature gravely erroneous. Nonetheless, the global market cap of cryptocurrencies rapidly increased with time, and currently stands at $1 trillion, despite recent market crashes.
Today, a large number of multinational companies accept cryptocurrencies as a mode of payment. However, central banks and law enforcement agencies remain wary of these instruments. This is because of the possibility of them being misused to support activities such as terror financing and money laundering. They are also perceived to adversely affect fiscal and currency stability. Many uninformed investors have also been duped by get rich quick schemes and suffered huge losses.
Different countries have responded differently to cryptocurrencies. El Salvador and the Central African Republic have adopted Bitcoins as legal tender. Yet, most nations including the United States (US), Japan, and the European Union shy away from treating these coins as money or fiat currencies, but recognise them as an asset class. They are all experimenting with regulations that could facilitate the growth of the industry, while curbing associated hazards. These countries are all mindful of the potential of Blockchain technology. It would drive Web 3.0, creating new industries worth billions, and could make the internet redistributive and fairer. In a Catch-22 for regulators, Blockchain networks cannot be created without distributing coins and tokens to their participating developers and validators, making crypto coins a necessary building block of this technology.
China remains the only major economy that has fully banned private cryptocurrency transactions. Its Central Bank Digital Currency (CBDC), digital yuan, however, has gained a huge head start. It has set up hundreds of millions of digital wallets, and made transactions worth billions. This could evolve into a powerful geostrategic tool. Countries including India, Russia, and the US are exploring the possibility of launching their own CBDCs. China, meanwhile, is attempting to optimise gains from this revolutionary technology, while excising the decentralising aspect, deemed by the Communist Party of China as a threat to its state control.
India is home to the world’s fastest-growing crypto developer and consumer ecosystems, despite the Reserve Bank of India’s continued hostility to private cryptocurrencies. India’s regulatory framework remains ambiguous, with the country not having an assigned regulatory agency. Digital assets have not been defined or classified. The taxation framework is vague, with high taxes proposed on gains and transactions, without giving an option to offset losses. This discourages mining that rewards developers and validators. It also creates avenues of government overreach. Debilitated by these conditions, many entrepreneurs and investors are shifting their bases to crypto-friendly offshore locations.
Against this backdrop, American Senators Kirsten Gillibrand and Cynthia Lummis, introduced a bipartisan legislation, the Responsible Financial Innovation Act, in June. Incidentally, the US Federal Reserve, similar to its Indian counterpart, has repeatedly attempted to stifle the burgeoning crypto industry.
The bill clearly defines all elements of the ecosystem, including digital assets and participating actors. The Commodity Futures Trading Commission (CFTC) would regulate digital assets that meet the definition of a commodity, such as Bitcoin. Validators and miners need to pay taxes only when their rewards are encashed. Minor transactions less than $200 would be tax-free. An industry sandbox would be provided where crypto firms could test their products in a controlled environment. Service providers have disclosure regulations to ensure that consumers make informed decisions. Stablecoin providers are obliged to eliminate consumer risks. CFTC and the Securities and Exchange Commission would collaborate with existing cyber security frameworks to keep out bad actors.
This comprehensive plan attempts to integrate digital assets into existing legal structures. It also envisions creating an innovator- and consumer-friendly secure domestic environment. India would do well to study various legislation enacted across global innovation hubs and create a progressive crypto regulatory framework that fosters domestic entrepreneurship. That would enable us to emerge as a pioneering leader in the fast-emerging Blockchain-supported Web 3.0 industry that is set to be a key driver of the digital economy.
Anil K Antony is a tech entrepreneur, public policy commentator, and works on the Congress’ digital initiatives
The views expressed are personal