By Rameesh Kailasam and Madhabi Sarkar
As India gears up for its first G-20 presidency, the first hints that the global regulation of virtual digital assets (VDAs) will be a priority item on the agenda have begun to trickle in. The prime minister has often called for global efforts to deal with cryptocurrencies. India has taken a regulatory approach, although the taxation of cryptocurrencies needs to be relooked in order to ensure transactions are viable. The crypto tax, TDS, off-set losses, and issues of inaccessibility with respect to the banking system have all discouraged transactions so far in India, with the sector witnessing chaos, and individual investors moving to overseas exchanges.
The latest growth spurt in the industry has led to a rapid rise in efforts to regulate VDAs, by state actors such as the EU’s Markets in Crypto-Assets Regulation (MiCA) or the US’s Responsible Financial Innovation Act (RFIA), as well as by international organisations such as the OECD, the IMF, and the BIS. However, a robust framework to be followed globally, for appropriately classifying both the assets as well as the economic communities behind VDAs, is yet to be defined.
It is clear that effective regulation can only be achieved when it is paired with the appropriate technological infrastructure and support from the local industry. Creating a dynamic map of individuals interacting with VDAs domestically and internationally is essential for tracking, tracing, and, consequently, enforcing these. For example, parts of the US or the EU have a warmer policy stance towards VDAs because they have the technological know-how and the support of domestic companies, enabling them to track transactions. What must be immediately addressed internationally is regulating the multinational intermediaries that allow international customers to enter the space, such as exchanges, asset-backed stablecoins, custodial wallets, remittance platforms, etc, because of the borderless nature of VDAs. Once an individual owns some VDAs, he/she is able to access services and transfer funds to people anywhere in the world.
In the absence of regulation, these platforms confer significant financial risk on their international users, who often end up trading on platforms with inadequate disclosures and no legal redress in case of bankruptcy. While recent efforts to regulate stablecoins in the EU and the US are a step in the right direction, a broader template to govern how governments can interact with these mega exchanges is urgently needed.
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Initial impressions suggest that combating capital flight, user protection, and money laundering are the key concerns on the VDA agenda—in line with the Indian government’s broader view on VDAs. They will likely feature most prominently in the G-20 finance track, with discussions revolving around establishing information-sharing norms and harmonising national regulations via a set of standard operating procedures (SOPs). G20 also presents a leadership opportunity for India in terms of setting global VDA SOPs in the context of emerging market or developing economy (EMDEs), and ensuring that they can appropriately benefit from the Web3 ecosystem, in contrast to the few multinational tech companies that currently serve as the gatekeepers of the internet. While the mitigation of money laundering and combating financing of terrorism are certainly major concerns for India, ensuring the creation of avenues for employment and wealth generation as India’s working-age population begins to bulge rapidly over the next decade surely assumes primacy.
Further, Web3 has the potential to generate employment needed to contribute to industrial and digital transformation. A quick calculation reveals that, currently, there are approximately 300 million individuals who own or use VDAs, of which 25-30 million are in India, making up a market of $3 trillion at its height. If VDA adoption continues to grow on a trajectory similar to that of the internet so far, we can conservatively conclude that, over the decade, that number could easily double or even triple. Given the current valuations and revenues of major VDA players, several studies have concluded that if the domestic industry is nurtured and allowed to interact with the global market, it has the potential to contribute more than $1 trillion to the GDP over the next decade. Web3 regulation can enable the liberalisation of services, allowing many of the 20+ million employed in the gig economy to explore their services and work opportunities.
Given India’s strong competitive advantage in terms of talent, it is estimated that India will have over 10 million developers by 2025. India currently has two crypto unicorns operating domestically, and is home to major VDA players and a thriving community with 25+ million people. At this crucial juncture, India has been given an opportunity to ensure a level playing field for VDA companies for EMDEs, by bringing in appropriate norms for regulation of mega companies, and enabling nurturing domestic regulatory environments by incentivising funding. It is pertinent to utilise the potential, and India should be one the key countries guiding the regulation and stewardship of the VDA dialogue at the G20.
Writers are respectively, CEO, and senior manager (public policy), Indiatech.org