Cryptocurrency Regulation in India and Around the World

On November 13th 2021, the Prime Minister of India chaired a meeting on the regulation of virtual and digital currencies.

India’s tryst with digital currencies such as crypto has been characterised by suspicion and intermittent upheaval. However, given the newfound zeal of the Government, the legal validation of the Supreme Court and the most striking restraint of the Reserve Bank of India from disciplining cryptocurrency businesses (yet again!), the country is perhaps heading towards a new dawn of gradual-albeit-begrudging crypto-acceptance in the coming days.

Let’s see how far we have come and where we stand in the world on cryptocurrency regulation.

The Road to Regulation

Over the last 12–18 months, the debate around cryptocurrencies in India has peaked immensely.

Reason: The tremendous rise in crypto businesses in the country.

As a percentage of population, India has the fifth-largest proportion of crypto-owners at 7.3% (101 million persons — see chart). One in every six urban Indians now owns some crypto.

As of October, there were 15 million retail crypto investors in India, which is more than the number of income tax payers in the country. The market for cryptocurrencies in India grew by a massive 641% in the last one year alone.

The mushrooming popularity of cryptocurrency exchanges and platforms in recent months like CoinSwitch Kuber, WazirX, CoinDCX, ZebPay, Unocoin, BuyUcoin etc. forms a case in point. Most of them allow easy, small-ticket investments from individuals. There are currently over 230 crypto startups and more than 150 proof-of-concepts and projects in the country that employ nearly 50,000 people. These companies have registered 40% to 50% growth in revenue over the last two years vis-a-vis a 10%-11% revenue growth in the wider technology sector, as per NASSCOM.

• And if statistics and market research are any indication, the trend is set to continue. A recent survey says that 19% of urban Indians plan on investing in virtual tokens within the next six months. Indians have invested $6.6bn in crypto assets whose market cap has crossed $40bn as of this year.

Suffice it to say that the numbers are already too big for the powers-that-be to stray from a “complete ban” on private digital tokens as they had planned to do (and did do, to some extent) earlier.

Hence, the Prime Ministerial-level meetings and ongoing deliberations with stakeholders in the crypto industry make sense. The idea is to etch out a legislation as early as in February or March next year (coinciding with the Union Budget 2022, if rumours are to be believed).

The Coin-to-Crypto Switch

One can agree that cryptocurrencies are a high-risk product with immense volatility. Made even more volatile when audiences are served with full-page ads and shiny campaigns in the media featuring their favourite stars, urging them to invest. With scores of celebrities jumping on to the crypto bandwagon, promotion for the asset has reached record levels. But that has also meant that behind the gold, the glitter remains vaporous at best.

This is especially true in light of the rise in numbers of crypto-related scams.

In October, a “play-to-earn” cryptocurrency, inspired by the Netflix show Squid Games, sold out within one second. Within a week, buyers reported facing problems while trying to sell the token which had zoomed by 75,000% and then nosedived to less than half a penny within a week. Back in September 2020, another token called SushiSwap disappeared with $13m worth investors’ money in a similar way.

These “rug pulls” where token creators abruptly vanish after exchanging virtual coins for cash have become dangerously commonplace. The possibility of anyone with a smartphone and working internet spinning up a token and a liquidity pool is the most glaring drawback of trading in the crypto-sphere, especially when there are no set rules to govern these practices.

This is largely why the call for regulation by players in the industry have picked momentum. Gone are the days when the RBI cautioned against and banned their use. Even though the cautionary tales worked their way previously, they are unlikely to do so going forward. Because along with private participation, state functionaries have also begun benefiting from use of crypto and blockchain technology, be it the Government of Maharashtra or the Central Board of Secondary Education (more details here).

In any case, a “middle ground” between pro-usage and deterrent enforcement lies as the focal objective for the design for the expected crypto bill.

But there are a great many challenges before that bill becomes an Act.

Regulatory Gray to Green

Whether it’s going to be a “wait-and-see”, a “public-and-private-partnership”, a comprehensive or a restrictive regulatory bill is anyone’s guess at the moment. The tax implications that come with regulation also pose challenges given the historical Centre-State discord on taxation matters. However, the bountiful gains in the form of expected capital gains from crypto businesses could entice the Government to march down a tax-progressive legislation route.

Secondly, the exchanges and platforms running crypto applications could face material changes in their business character with how the bill is designed. Theoretically, the Government could also say yes to CBDCs and no to private cryptocurrencies, which would spell another kind of regulatory turbulence.

And then there is the famously erratic stance of regulatory bodies like the RBI towards cryptocurrencies. Money laundering and financial malpractices lie at the core of these concerns which could sway given the massive financial setbacks that affect the prices and valuations of virtual currencies and affiliated businesses.

No country in the world, including India, has a comprehensive law on cryptocurrency regulation as of yet (yes, not even El Salvador because trading is distinct from granting the status of legal tender). While some like China have taken a hardline stance with bans on trading and mining activities, others allow limited trading (in futures, options, ETFs etc.) hinting at indirect regulation.

And “trading” is simply one aspect of regulation when it comes to governing instruments like cryptocurrency whose applications spread farther and wider than continents. Legislation must also follow inroads into policy mechanisms, accounting standards and IPR protection to combat money-laundering and/or terror-financing activities.

However, like an analyst puts it,

"For every problem statement, there is a regulatory solution which doesn’t amount to a ban."

This means given the crypto-penetration in India today, if a ban was the answer to regulation, then that would NEED to be justified as the “only way” to regulatory success.

It remains to be seen how pragmatically the policymakers tailor out the deficiencies and guarantees in one of the most-awaited statutes in recent years.

(Originally published November 16th 2021 in transfin.in)