A typical crypto may include cryptocurrencies, virtual assets, and digital currencies. But for the purpose of this discussion, I am focused on cryptocurrencies, tokens, and their derivatives that are cryptographically secured. Crypto-coins work through a distributed ledger technology, which keeps a secure record of individual coin ownership. Property rights can be transferred from one person to another electronically.
Given the digital nativity of these currencies, the lack of transparency about traders and traders, and the global ubiquity of crypto platforms, an unregulated crypto can be a major systemic challenge. A person could buy cryptocurrencies in a foreign currency abroad and sell them to a person in India, earn large sums by avoiding taxation and circumventing know-your-customer (KYC), anti-money laundering (AML) or currency rules. Effectively, unregulated cryptocurrencies can mean unhindered money laundering, unregulated outflow and inflow of forex and a side door to full currency convertibility. As an alternative currency, it could pose a threat to monetary policy and cause problems related to investor protection and fair market practices, security and technological risks.
So is there any other option than to regulate the crypto market? Some might say banning cryptocurrencies in India. But is it really an option? Crypto is a digital product without physical traceability. It can already be found in the Indian market in one form or another. Regulating the crypto market with very strong checks and balances could be a solution.
The big question that most regulators across the globe are struggling with is how to regulate this market. Indian policy makers could also look at the approach being followed in some countries. In the UK, the Financial Conduct Authority had provided guidance and a regulatory approach in 2019. Furthermore, a favorable environment for innovation was promoted by addressing uncertainty around taxation and KYC / AML. Any sale, use or exchange of cryptocurrencies attracts capital gains tax, and providers of exchange purses must be registered.
Singapore has also adopted a very supportive approach with a comprehensive regulatory framework, including MAS licensed and regulated digital payment token and service providers, Financial Action Task Force (FATF) rules on AML / CFT (anti-terrorist financing) and tax rules with no long-term gains possessions. In Japan, cryptocurrencies are recognized as cryptocurrencies and regulated by the Securities and Exchange Commission. AML / CFT compliance under the FATF has been mandated and income / gains from cryptocurrencies are taxed as miscellaneous income. Brazil has not issued any specific rules, but existing rules for the financial sector cover the crypto business. Capital gains tax is applicable, and it is the citizens’ responsibility to pass on information to the tax authorities.
China, on the other hand, has announced a ban on cryptocurrency transactions. It is conducting a multi-year experiment with its Central Bank Digital Currency or CBDC (called e-CNY), which was rolled out in 4 cities to 21 million people and over 3.5 million corporate wallets, resulting in over RMB 34.5 billion. .
In my opinion, the regulatory framework will depend on how we define a cryptocurrency: is it a currency, an asset or a commodity? The overall legislative framework / response could be:
- A detailed KYC framework for any crypto transaction or ownership where one leg of the transaction is in India or by an Indian
- A detailed ALM framework based on traces of money
- An appropriate tax framework
- Securities laws depending on whether it is considered a security or a commodity
Given that crypto is a new and evolving technology, of course, the regulatory framework must also be dynamic and evolving. Finally, a panel of crypto-experts should be set up to help the government, regulators and policy makers keep a regular record of the situation and to facilitate appropriate decision-making.
In conclusion, I would say that business as usual is not an option. No action on the part of the government would mean acceptance of the status quo, which has several risks. It will no doubt certainly not be easy to regulate crypto. But it’s heck if you do, heck if you do not. A rapid and evolving regulatory response is a must to decode the cryptic cryptos.