Why we need smart regulation of crypto assets for India

Regulation of cryptoassets such as Bitcoin and Ethereum is a hot topic globally. Countries are in various stages of banning, unbanning, re-banning and regulating cryptoassets. 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 cryptoassets. That they make finance more inclusive and decentralized. But India already has the world’s largest financial inclusion program in Jan Dhan. In the last seven years, 430 million bank accounts have been created for the underbanked. A majority, 55%, of them are women. There are 45,000 chit funds (and lots 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 cryptoassets in India.  

But there are three compelling India-specific reasons to embrace cryptoassets.  

Establish India as an integral part of the new financial ecosystem

Large global financial institutions and investors are adding cryptoassets to their portfolios. Domestic crypto markets in India and these global opportunities are synergistic. Finance firms, banks, fintech and crypto start-ups can tap into the huge growth of the industry. STPs and SEZs enabled the IT services boom. Creative ‘Crypto Export Zone’ schemes can incubate clusters of excellence and create world-class financial services firms and unicorn start-ups.   

Capitalize on new technology and services opportunities

Banking, Financial Services and Insurance customers form the biggest chunk of India's IT services. 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.  

Gain optionality on financial innovation.  

There is a burst of technology innovation and business models around blockchains. There are already 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.  

There are 3 key regulatory concerns about cryptoassets.  

Investor Protections

Investor protection has been a top priority for Indian regulators. Cryptoassets are seen as high-risk, speculative assets. Investor education, guidelines against mis-selling and other safeguards are needed.  

Cryptoassets 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 cryptoassets may allow individuals to bypass securities issuance laws. That's a potential risk to capital markets. Cryptoassets 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.  

Illicit Transfers

Anonymous transfers of cryptoassets may weaken Anti-Money Laundering (AML) laws or Combating the Financing of Terrorism (CFT) rules. That’s a potential national security issue. Robust KYC norms are the solution here. Also, a blockchain may bring more transparency for financial transfers as all its transactions can be examined.   India is a part of the G-20 Financial Action Task Force (FATF), and the crypto industry players should adhere to FATF’s recommendations.  

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.  

Kashyap Kompila

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Kashyap Kompella, CFA, is a technology industry analyst.