Crypto Regulation Offers India An Opportunity That Must Be Seized

Context: The proportionate, proactive, participative and process-driven regulation of crypto-currencies will aid the success of Digital India.

Opportunities in hand

• Being part of global trend: Central banks around the world, from the European Central Bank to China’s and Turkey’s, are in the process of issuing CBDCs.
  • Upholds RBI’s monetary sovereignty: Exclusive power of the state over legal tender.
  • Co-existence and innovation: International Monetary Fund (IMF) has indicated that private and public money can coexist and in complementary rather than contradictory roles.
• Applications of blockchain in ‘regtech’: For regulators to capture and store data, in automated risk management, and for the facilitation of regulatory reporting etc.
• Inherent benefits: Can make financial services more accessible, cost-effective, efficient, interoperable and scope for innovation.
• Financial inclusion: Financial Action Task Force (FATF) report highlighted the potential for financial inclusion of the technology.

Risks associated with crypto-currency

• No intrinsic value: Lack of backing by a tangible asset; thus they have only virtual market value.
• Risk of market manipulation: As price, discovery is in uncharted territory.
• Concerns of information asymmetry, hacking vulnerability and fire sales: Threat to systemic stability.
• Risks of money laundering: FATF report underlined crypto anonymity and layering.
• Threats of virtual ban: Tend to push activity underground, which allows for abuse and almost impossible to implement.

Way Forward:

• Mitigation of associated risks: Through a combination of traditional and non-traditional methods, including customer identification, verification and transaction-monitoring prerequisites.
  • Focus on consumer protection to systemic safety through micro and macro-prudential regulation of private digital tokens, upholding fair market conduct, data privacy and operational resilience.
• Regulate private digital currency:
  • Uphold principles of proportionality and proactiveness: Supreme Court struck down RBI’s ban of cryptocurrencies, stating that regulatory powers must be exercised upholding proportionality.
  • Participative regulatory governance: Private cryptos can be tested in a controlled environment, such as a regulatory sandbox or RBI’s Innovation Hub. (providing an iterative learning process)