On January 31, the Ministry of Finance presented the Economic Survey 2022-2023 in Parliament, which summarised the performance of the economy. One of the key issues discussed in the survey was crypto assets, which it defined as ‘self-referential instruments that do not strictly pass the test of being a financial asset due to their lack of intrinsic cash flows’.
The survey highlighted the necessity of common regulations for the cryptocurrency ecosystem, citing recent events such as the FTX exchange collapse and subsequent cryptocurrency market sell-off. It also called attention to the high volatility of the crypto market, highlighting its valuation which peaked at nearly $3 trillion in November.
Cross-border Coordination
Due to the lack of intrinsic cash flows attached to crypto assets, such as Bitcoin and Ether, they are not considered financial assets by regulators in the United States, and they pose significant risks to the banking system.
The Economic Survey noted that the G20 is now discussing a coordinated approach to regulating crypto assets, highlighting its significance in the global financial markets. The decentralisation promised by crypto assets, however, has yet to be realised. Instead, new central intermediaries, such as crypto exchanges, wallet providers, and crypto conglomerates, are requiring users to, essentially, trust them as a substitute for a lack of regulation.
Despite these issues, the survey does recognise that there is a ‘minimal’ global standard for unbacked crypto assets, thus limiting the effectiveness of national approaches. To address the issues facing cryptocurrency, the survey suggests cross-border coordination and a unified global framework for the asset class.
It notes that an important aspect to consider is the ‘interoperability’ between the different multinational regulators of crypto assets and the future ‘regulation of digital currency market participants’. While there has been talking of regulating digital currency market participants, this has yet to come to fruition, leaving more questions than answers.
Global Approach
The European Union has taken significant strides in the regulation of cryptocurrency with the Markets in Crypto Assets (MiCA) aimed at stablecoins and the regulation of key entities including exchanges and wallet providers. Japan has also introduced several regulations for crypto asset service providers, mandating client asset segregation, operational risk and cyber security management, know-your-customer (KYC) requirements, internal audits, and minimum capital requirements. Stablecoins have also been subject to Japan’s partial amendment to the Payment Services Act, etc.
Switzerland has provided its own set of guidelines for initial coin offerings and has amended various civil and financial market laws to pave the way for ledger-based securities. Additionally, the United Kingdom, Albania, and Nigeria have all put forth their own regulatory approaches to the cryptocurrency world.
The United Kingdom has declared security tokens to be within the regulatory purview and has moved to promote their use for investments. Albania has taken a more progressive stance, legalising crypto assets and introducing the ‘Fintoken Act’ to regulate and supervise stablecoins and crypto assets through the Albanian Financial Supervisory Authority and the National Agency for Information Society.
Nigeria has taken a more conservative approach, declaring crypto assets as not being legal tender, and imposing restrictions on trading and facilitating payments for crypto asset service providers. However, the Securities and Exchange Commission has recently outlined new rules for the issuance offering, and custody of digital assets as an olive branch for companies looking to break into the Nigerian market.
Path Forward
In India, the decision to keep a 30 per cent tax on virtual digital assets is disheartening, but the best way forward for the industry is to drive profits to the treasury, create new services for the government, and make a strong case for changing these regulations. If the industry can make a compelling argument, then there may be an opportunity for the industry and India to benefit from the rise of digital assets.
Regulation of cryptocurrency remains a complex and ever-evolving issue with many challenges. Fast-paced developments in the crypto market and a fragmented regulatory landscape have added to the complexity. A coordinated global approach to regulating crypto assets is becoming increasingly important due to the growing significance of these assets. With the right policies and frameworks in place, the potential of these assets can be realised, and the risks associated with them can be minimised.
(Shefali Pahwa is Founders and Managing Partner, and Ayush Kulsreshtha is Associate, Block Legal.)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.