With an estimated 15 million Indians holding digital currencies, cryptocurrencies need to be regulated like any other financial asset and it would be unwise for India to ban private crypto assets when it has the ability to capitalise on it, a study released by Observer Research Foundation (ORF) said on Tuesday.
The Indian crypto asset industry has witnessed exponential growth over the last five years. An estimated 15 million crypto-asset holders have put in Rs 660 crore in these crypto asset holdings.
India now has two crypto unicorns and over 350 crypto startups in what is clearly a flourishing industry. The report said the country is well placed to capitalise on the opportunity that crypto-assets present due to its expanding private crypto market.
"Cryptocurrencies, like any other financial asset, need to be regulated in order to ensure consumer welfare as well as promote innovation," a statement summarising the findings of the report on Regulating Crypto Assets in India said.
"It would be imprudent to place a blanket ban on private crypto assets. This would result in significant revenue loss to the government and may encourage nascent industries to operate illegally."
The new monograph by ORF in collaboration with the Esya Centre presents a deep dive into the growth of cryptocurrency in India and proposes a balanced regulatory approach.
India, the report argues, has a history of banning goods and services that exemplify innovation in new markets. Such bans often lead to unintended consequences, which include large revenue losses to the government that impact the livelihoods of people, and have had severe implications for industries, forcing them to enter illegal markets.
It cited the recent example of the ban on the use of drones in India in 2014. That ban effectively clipped the wings of a nascent domestic industry, while people continued to use them in defiance of the ban.
Meanwhile, Chinese companies such as Da-Jiang Innovations (DJI) manufactured recreational drones during 2014-2018 at scale and now command 70 per cent of the global market. They have also diversified into end-to-end drone management services such as photo and video editing software.
In 2018, India realised that a blanket ban was ineffective and resulted in a missed opportunity for the domestic industry. It, therefore, introduced a regulatory framework to govern the use of drones in the country.
Similarly, much earlier in the pre-liberalised era, India tried to ban the import of gold. However, after several years of trying to clamp down on smuggling, the government had to withdraw the ban.
"A prohibition on the crypto assets may have similar repercussions for the crypto asset industry. Due to the decentralised nature of the technology and the ease of transferring crypto-asset using the public key, it is technically impractical to stop the inflow of crypto-asset from abroad," the report argues.
The report is a first-of-its-kind deep-dive into the world of cryptocurrency in India - one of the fastest-growing consumer bases globally. This analysis comes at a time when the government is looking to introduce a bill to regulate the asset.
It offers key policy suggestions on building the ideal crypto regulatory framework that would both benefit India's economy and ensure consumer welfare, the statement said. Instead of banning, the report suggests a balanced regulatory approach, which addresses the concerns of fiscal stability, money laundering, investor protection and regulatory certainty while fostering innovation.
"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," says co-author Meghna Bal.
"They just have to be adapted to accommodate an emerging technological paradigm. The recommendations in our report show how this can be done."
In India, classifying crypto as security, good or capital asset could lead to unintended restrictions on investment or leave regulatory gaps in key policy areas. 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 must include: it must be 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.
The regulatory framework should also protect crypto asset service providers from being liable for the actions of investors on their platforms. This will help asset service providers innovate and scale new crypto-based products and offerings.
The report proposes that the Government adopt a co-regulatory approach where industry associations and authorities such as SEBI, the RBI, and the Ministry of Finance share the responsibility of oversight. Such an approach follows the Japanese model, where authorities have tasked industry associations to enforce regulations.
Providing incentives to industry whistle-blowers could help players within the crypto-market self-regulate. What India needs is a facilitative regulatory framework that would boost the growth of India's crypto ecosystem while addressing any possible harms to consumers and society at large, it added.
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