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

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The regulation of crypto assets like bitcoin and ethereum is a hot topic globally. Countries are at various stages of banning, de-banning, re-banning, and regulating crypto assets. We can learn from other countries, but what we need is smart regulation made in India.

To understand why, let’s take one of the often touted benefits of crypto assets, which is that they make finance more inclusive and decentralized. But India already has the world’s largest financial inclusion program in Jan Dhan. Over the past 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 many more unregistered). These chit funds are the largest decentralized financial applications in the world. Crypto cannot match this scale. Thus, financial inclusion is not the main reason for adopting crypto assets in India. But there are three compelling reasons specific to India to adopt crypto assets.

Make India an integral part of the new financial ecosystem: Major global financial institutions and investors are adding crypto assets to their portfolios. India’s national crypto markets and global opportunities are synergistic. Finance companies, banks, fintech and crypto startups can benefit from the huge growth in the industry. Software technology parks (STP) and special economic zones (ZES) have enabled the development of IT services. Creative “crypto export zone” programs can incubate clusters of excellence and create world-class financial services companies and unicorns.

Capitalize on new technology and service opportunities: Banking, financial and insurance service customers make up the bulk of India’s IT services. Blockchain application development, scalability, security and analytics are their next growth opportunities. To meet this demand, it is necessary to have a large pool of talent with expertise in crypto technology stacks.

Earn options on financial innovation: There is an explosion of technological innovation and business models around blockchains. There are several great apps out there, but killer new apps will emerge. The impact of new technologies is overestimated in the short term, but underestimated in the long term.

Next, consider the regulatory perspective. Regulation of the financial sector in India tends to be conservative, and that’s a good thing. This same conservatism helped Indian financial institutions weather the 2008 global financial crisis better than many Western companies. And, there are three main regulatory concerns regarding crypto assets.

Investor Protection: Investor protection has been a top priority for Indian regulators. Crypto assets are considered high risk speculative assets. Investor education, anti-abuse guidelines and other safeguards are needed.

Crypto assets are now better understood as digital assets rather than digital currencies. Regulating them like commodities and clarifying their tax treatment is a win-win solution. Government tax revenues are increasing. It can also increase the number of tax filers (only 64 million in FY20) and the number of taxpayers (14 million).

Bypass Current Regulations: Certain crypto assets may allow individuals to bypass securities issuance laws. This is a potential risk for the financial markets. Crypto assets can be used to avoid capital controls. This is a potential risk for macroeconomic stability. If crypto holders are required to report their holdings above a particular level on their tax forms, these concerns can be alleviated.

Illicit Transfers: Anonymous transfers of crypto assets can weaken laws against money laundering or the financing of terrorism. It is a potential national security problem. Robust Know Your Customer (KYC) standards are the solution here. In addition, a blockchain can provide more transparency for financial transfers because all of its transactions can be examined. India is part of the G20 Financial Action Task Force (FATF) and players in the crypto industry must adhere to the FATF recommendations.

In summary, a smart regulatory approach takes into account both the potential advantages and disadvantages. It fosters financial innovation, protects investors and liberates the Indian crypto ecosystem.

Kashyap Kompella, CFA, is a technology industry analyst.

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