The report suggests that an 'India Wallet' linked to DigiLocker will help the government in tackling KYC, the inflow and outflow of cryptocurrency and monetary concerns.
The Government of India is concerned about the impact of cryptocurrencies and is planning to introduce certain regulations. Global experience till now suggests that attempts at banning cryptocurrencies have failed to curb their rising popularity. In such a situation, the best possible way for the government to keep an eye on crypto activities could be to introduce the country’s own crypto wallet linked to DigiLocker, according to a report published by emerging technology thinktank Policy 4.0.
The report suggests that an ‘India Wallet’ linked to DigiLocker will help the government in tackling KYC, the inflow and outflow of cryptocurrency and monetary concerns. The report said that DigiLocker can provide a consolidated “Crypto Wallet verification Service” to all wallet players, comprising credentials such as Aadhaar, PAN and bank account details. Once users provide these credentials into DigiLocker, the verification service can be enabled for them. Time limits or expiry can also be set on these so they are periodically updated and verified.
In India, multiple risks posed by cryptocurrencies relate to financial stability, monetary policy, capital controls, illicit activities and investor protection. The use of DeFi for crypto transactions also poses a rising monetary challenge. However, the report says that ‘India wallet’ could be a one-stop tool for ring-fencing risks and managing domestic and crossborder cryptocurrency activities of Indians. It can work for all kinds of cryptocurrency activities, whether through centralised players or the DeFI platforms.
Why India Wallet?
The thinktank’s recommendation to create an ‘India wallet’, derives from the premise that all cryptoassets, including tokens such as Bitcoin, altcoins, NFTs, stablecoins etc., whether listed on a centralized or decentralized exchange, are fundamentally just a key pair, comprising public and a private key.
Ownership of the keys gives ownership to the asset. Currently, both the custody of keys as well as transactions across the cryptocurrency ecosystem are managed by wallets such as Metamask, Trust Wallet and others, which become a de facto passport into the cryptocurrency ecosystem
The report says that ‘India Wallet’ would help in handling monetary risks of financial stability, exchange rate risk/capital controls and cross border flows. It will also help in handling illici activities, money laundering and tax compliance risks.
“Individuals can only have one Unique KYC verified Wallet. If financial stability risks are deemed acute, then a cap could potentially be enforced on the wallet on the amount of investment into cryptocurrency by citizens. Such caps may be managed flexibly and imposed only when stability risks are deemed acute. They can also be increased or decreased based on criteria that the government defines,” the report said.
Cross-border transfer risks
“The India Wallet can segregate Indian and international activity in crypto, in such manner that any Wallet not verified through Digilocker or UIDAI facility will be considered as a foreign wallet. Fund flows to such wallets can be tagged with a “Cross-Border” marker in the wallet itself at the time of transaction.”
“India Wallet will ensure that all crypto transactions are recorded, traceable and can be easily compiled and reported for the purposes of any statutory compliance. The Solution will also help in tracking Tax liabilities and will defuse any possible attempt of Tax avoidance,” the report said.
Features of India Wallet
The thinktank has recommended India Wallet to have the following features:
- Works for almost all blockchain protocols
- Works for all crypto activity (trading, DeFi, NFT), stoers tokens, collectibles, coins.
- Can integrate with almost all crypto applications – exchanges, NFT marketplaces etc.
- Can differentiate between domestic and cross-border transfers.
Some media reports recently said that the Government may allow only a few crypto assets. However, such an approach may not work in the rapidly evolving crypto ecosystem.
Instead, the thinktank said that crypto assets are rapidly evolving, with new forms of tokens emerging that defy easy classification into either securities, commodities, utility or currency. The momentum of activity is also shifting away from centralized exchanges such as WazirX, CoinDCX and others and into Decentralized Finance (DeFi) platforms.
According to a 2021 Chainalysis report, India alone is estimated to have $1.25 billion in fund transfer through DeFi platforms. Cryptocurrency activity through Decentralized Finance (DeFi) channels has become a major monetary concern, and there are few global precedents to assuage the concerns of Indian regulators.