The Indian cryptocurrency industry, while nascent, has had reasonable success. CoinDCX and CoinSwitch Kuber, two Indian crypto exchanges, are valued at above a billion dollars. The country also has a thriving ecosystem of crypto startups that has received its highest infusion of funding so far. They racked up $587.16 million in investment till October 2021 alone, compared to just $37.56 million in 2020. Moreover, the Indian crypto startup Polygon Hermez is hailed by experienced technology investors such as billionaire Mark Cuban as a promising crypto scaling solution. Therefore, decision makers should be mindful of the long-term potential of the Indian crypto market and enact legislation that fuels the growth of this emerging but valuable ecosystem.
Crypto exchange loopholes under govt eye
In early November 2021, the Bengaluru Police arrested Srikrishna Ramesh or ‘Sriki,’ a hacker who allegedly stole Bitcoin, a prominent cryptocurrency. It brought cryptocurrencies under the Union government’s scanner. Sriki said that he stole Bitcoin from the exchange Bitfinex in 2015. His arrest has now acquired political colour, with opposition parties accusing the BJP of trying to cover up the case. In response, Prime Minister Narendra Modi called for a meeting on 13 November to discuss how cryptocurrencies should be regulated in the country. On Monday, the Parliamentary Committee on Finance met industry associations and experts to evolve a consensus on the regulation. These developments indicate a strong likelihood that the government might introduce a law for the same in the upcoming winter session of Parliament. The question is, what should such legislation look like?
Balance innovation with public interest
First, any regulation should seek to preserve innovation while addressing policy concerns posed by cryptocurrencies. While they are currently an asset class, they will form the basis of the future of finance and the Internet. Tim Berners-Lee, the inventor of the World Wide Web, says that cryptoassets presage the next version of the Internet, where users will have complete control over their personal data.
Recognising the long-term potential of these assets, most jurisdictions are working to enact regulations that are innovation-friendly while addressing the governance challenges raised by cryptocurrencies. For instance, the European Union’s (EU) recently-launched Digital Finance package aims to introduce a regulation that encourages innovation and does not impede the development of new technologies. It includes a regulatory proposal for Markets in Crypto Assets (MiCA). Among other things, the MiCA seeks to harmonise the regulatory treatment of cryptoassets across the EU to facilitate the sector’s development. It also aims to make the registration of exchanges in any member country ‘passportable’. Thus, registration in one nation allows a crypto-business to operate across the EU and carry out cross-border transactions between its member states.
Second, cryptocurrencies should be regulated via exchanges. Most of them have a publicly-available identifier, known as a public key or address, whose movement can be tracked across the blockchain. While the assets are traceable, the identities of the individuals holding them are not. However, most cryptocurrency transactions are now being consolidated through exchanges—accounting for 75 per cent of Bitcoin volume, according to one study. Thus, regulating the crypto industry through exchanges will help in resolving the crypto identity problem to a large extent. This, in turn, would help address concerns around cryptocurrencies and money laundering, terror financing and tax evasion.
Cryptocurrency exchanges can be notified as reporting entities under Section 12 of the Prevention of Money Laundering Act (PMLA), 2002. Under the law, a reporting entity must maintain records of clients, certain types of transactions, and report such information to the designated statutory authorities.
Also read: Need to regulate, not ban cryptocurrency, Parliament panel members & experts suggest
Protect investors
Third, there should be investor protection norms that focus on educating investors and building awareness. Cryptoassets are a relatively new asset class, underpinned by a complex technological construct. Disclosure requirements should include the provision of a white paper that details the technical components of the cryptocurrency as well as its purported use case.
Moreover, instead of banning advertisements as some reports indicate, legislators can work to regulate them. Advertisements are an important means of raising awareness and educating consumers. As a point of recourse, legislators can consider importing provisions from the Advertising Code under the Sixth Schedule of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, which prohibits the appearance of celebrities in ads and requires them to be accurate, complete, and unambiguous.
Investor protection should also focus on maintaining the security of funds. Most cryptocurrency theft instances are consequences of hackers attacking vulnerabilities in the security systems of exchanges. The Sriki-Bitfinex hack that prompted the current Bitcoin scandal is one such example. Authorities should work with exchanges to work out minimum standards for securing cryptocurrencies and institutionalise their review so that they may be updated on a regular basis.
While crypto is a new technological construct, the regulatory concerns presented by it are not. India has frameworks that tackle problems around money laundering, investor protection, and tax evasion. The trick is balancing these provisions with evolving technologies without imposing unreasonable constraints on their development. With due respect to Rudyard Kipling, policymakers and legislators must keep their heads about them while others are losing theirs in the context of crypto markets. The crypto economy will likely underpin the internet of the future. India is well-placed to play a leading role in this future digital paradigm, and must legislate to cement its ability to do so.
Meghna Bal is a consultant for Koan Advisory on emerging technology and intellectual property. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.
(Edited by Humra Laeeq)