How India can make cryptocurrencies mainstream
Despite their growing popularity, the anonymous nature of cryptocurrencies and their increased use in nefarious activities such as money laundering and funding terrorist activities have brought cryptocurrencies under the scrutiny of global regulatory authorities and governments.
Capital market authorities have also come to regard Initial Coin Offerings (ICOs)—a type of crowdfunding using cryptocurrencies—as glorified Ponzi schemes.
To check such misuse, cryptocurrencies are coming under the regulatory net. Japan recently became the first country to regulate cryptocurrencies; the US is quickly laying down regulatory guidelines as well, the UK and Australia continue to work on the formalities, while China has recently banned the ICOs.
Though India is a relatively small theatre in the global cryptocurrency market as it accounts for about 2% of the $170 billion global cryptocurrency market cap, the RBI has warned about their potential financial, legal, customer protection, and security-related risks, amidst prevalent media rumors of the possibility of RBI launching its own cryptocurrency called Lakshmi.
The rapid proliferation of the cryptocurrency ecosystem in India and incidences of cryptocurrency theft have also raised doubts about the safety of the IT infrastructure used by such entities.
With the country’s evolving cryptocurrency ecosystem and the maturing global regulatory landscape in mind, the Centre had appointed an inter-disciplinary committee to draft measures for dealing with cryptocurrency issues related to consumer protection, money laundering, etc.
Though the draft proposal isn’t public yet, some panel members are said to be in favor of stricter regulations to govern cryptocurrencies, and even introduce a tax policy for cryptocurrencies similar to those in place for gold.
A well-structured regulatory framework is vital to ensure transparency in cryptocurrency ownership. It will also help create a secure and scalable cryptocurrency trading environment, which will bolster trust among Indian cryptocurrency owners.
It’s now essential that the Indian Government and other stakeholders maintain momentum and take concrete steps toward laying a strong foundation for cryptocurrency regulations. It would also be prudent to adopt and implement some of the best global regulatory practices governing cryptocurrencies.
A suggested time-bound and phased approach would be as follows:
1 – Immediate Future (Timeline: Up to One Year)
Strict Enforcement of KYC Norms and AML Systems
While the three biggest Indian Bitcoin exchanges – Zebpay, Coinsecure, and Unocoin – have been operating self-regulated trading platforms with strict KYC and AML systems, the same should now be enforced by all entities (exchanges, wallets, etc.) dealing in cryptocurrencies. Linking users’ PAN/Aadhaar number to their accounts/wallets would boost transparency in cryptocurrency ownership and trading.
Securing IT Systems
The RBI should make it mandatory for cryptocurrency service providers to follow its ‘Cyber Security Framework’ and to put fully auditable IT infrastructure and cybersecurity measures with similar rigor as that of the BFSI sector.
Finalizing Tax Implications
The Ministry of Finance should also clearly define tax implications for cryptocurrency trading. Since such cryptocurrencies are unlikely to be used in transactions, they should probably be treated like equities and exempted from long-term capital gains tax.
Near Future (Timeline: Beyond One Year)
Capital Market Guidelines
The SEBI should not only commence research in fundraising activities such as ICOs, but should also coordinate with other global capital market regulators to stay abreast of the best practices being implemented in the more mature capital markets.
To sum things up, establishing a regulatory landscape is not a one-time exercise. Rogue elements will continue to seek new ways to exploit system weaknesses. As the cryptocurrency landscape evolves and the uses of cryptocurrencies grows, Indian authorities need to ensure their regulatory framework keeps pace with cryptocurrency’s technological advances.
(The author is the Co-CEO of Aranca. Views expressed above are his own)