India must regulate cryptocurrencies in consumer interest: Report

Crypto-assets are not only likely to form the basis for future forms of the internet but also India is well placed to capitalise on this due to its burgeoning private crypto market.

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A facilitative regulatory framework, will not only boost the growth of India’s crypto ecosystem but also address any possible harms to consumers and society at large.

The Indian Crypto asset industry has witnessed exponential growth over the last five years. More than 15 million Indians now hold digital currencies. As a result, experts say, like any other financial asset, cryptocurrencies also need to be regulated to both protect consumer welfare as well as promote innovation.

A report ‘Regulating Crypto Assets in India’ by the Esya Centre and Observer Research Foundation states that crypto assets are likely to form the basis of future forms of the internet. The report talks about the world of cryptocurrency in India, one of the fastest-growing globally, and comes at a time when New Delhi aims to introduce a bill to regulate the asset.

The report highlights that crypto-assets are not only likely to form the basis for future forms of the internet but also India is well placed to capitalise on this due to its burgeoning private crypto market. Given this, industry experts point out it would be unwise to place a ban on private crypto assets as these can result in significant revenue loss to the government and force nascent industries to operate illegally. Instead, the report advocates a balanced regulatory approach that addresses concerns of fiscal stability, money laundering, investor protection and regulatory certainty while preserving innovation.

Meghna Bal, one of the authors say, “Most regulatory formulae necessary to address the policy concerns related to crypto-assets, such as investor protection, foreign exchange management, money-laundering and tax evasion, already exist in financial legislation. They just have to be adapted to accommodate an emerging technological paradigm.”

In India, experts say classifying crypto as security, good or capital asset could lead to unintended restrictions on investment or leave regulatory gaps in key policy areas. The report states, a sui generis crypto framework that adopts the nuances of the crypto industry would be more appropriate and in keeping with emerging global trends.

The report also lays out suggestions for lawmakers on what a crypto regulatory framework should include: technology-neutral, innovation-friendly and consistent to fully harness India’s potential in this domain. Among other things, the framework must lay down clear definitions, identify the relevant regulatory bodies and create KYC/Anti-money laundering obligations, the report says. It should also provide crypto asset service providers with safe harbour–protection from liability for the actions of investors on their platform. The report points out doing this will help asset service providers innovate and scale new crypto-based products and offerings.

The report also recommends the Government adopt a co-regulatory approach where industry associations and authorities such as SEBI, the RBI, and the Ministry of Finance share responsibility for oversight. Such an approach takes a leaf out of Japan’s book, where authorities have tasked industry associations to enforce regulations. The report also recommends incentivizing industry whistleblowing so that players within the crypto-market work to keep a check on each other’s activities.

The report further states, such a facilitative regulatory framework, will not only boost the growth of India’s crypto ecosystem but also address any possible harms to consumers and society at large.

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