Should Governments regulate Cryptocurrency?
It is not a surprise that the changing landscape of the digital environment has brought with it a lot of changes, both good and bad. The one aspect that is at the top of that ranking table is Cryptocurrency. Bitcoin, Ethereum, Tether, Solana are just a few of the 13,000 Cryptocurrencies that are traded all over the world. At a market cap of $1.1 trillion, Bitcoin is the highest valued Crypto in the market as of November 19, 2021. The fact that the Oxford English Dictionary introduced the word in the dictionary in 2013 itself should have been a fair enough warning that Cryptocurrency, in general, was here to stay.
The rise of Cryptocurrency
The exponential rise in the number of Cryptos and their users is due to the fact that Cryptos are not managed by the central bank of the country. Consequently, it is not up to a country or the central bank to devalue Cryptocurrency. The blockchain technology that is behind Cryptos is also considered to be more transparent and secure than the traditional monetary system. However, there’s a caveat. They fluctuate in value. The highs are high and the lows are low. They are not backed by a commodity. The venerable Warren Buffet himself has warned early investors to steer clear of Cryptos because of their volatility.
Countries like the USA, Canada, and Australia are Crypto-friendly; El Salvador has gone a step further and made it legal tender. Countries like India, Russia, and China maintain their status quo of not legitimizing the use of any Cryptocurrency. They believe that the anonymous nature of such a currency makes it prone to criminal use. In India especially, it is not illegal to own or use them, but it is not encouraged as in the event of fraud, your grievances will go unaddressed.
It has been seen in a lot of situations that banning a commodity will not reduce its use, but it would only increase the number of backdoor channels that would open up for its utilization. Hence, the government is keen on legitimizing and regulating Cryptos so as to keep them from being the route for terror financing, trafficking, and other unscrupulous activities. Regulating Cryptocurrencies seems like a wet blanket as the very attraction of Cryptocurrencies is that they are outside the regulatory purview. However, regulation is the need of the hour before it gets out of hand.
Who should regulate Cryptocurrency?
Around the world, even in countries like US and Canada, where Crypto is not discouraged, there is no proper regulatory framework or an exclusive regulatory body. Other parallel measures are being taken to keep it as safe as possible. In the US, Crypto exchanges need to be registered as they fall under the Bank Secrecy Act (BSA). Canada also requires its Crypto investment firms to be registered and has approved a bitcoin ETF.
In India, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have the potential to be Crypto regulators since they are already established regulatory bodies. But, Cryptocurrency exchange associations have suggested that a new regulatory body be set up exclusively for Cryptocurrencies, and their investment and trade, due to their fresh and hitherto unseen identity. The new regulator should have representation from SEBI, RBI, the government and Cryptocurrency stakeholders.
A prerequisite for all of this is to decide whether Cryptocurrency be deemed a security, a commodity, a currency, or a property. The community of Crypto users is making a plea for Crypto to be classified as an asset, rather than a currency so that a complete ban can be avoided.
How can Cryptocurrency be regulated?
At the recently held Sydney dialogue, PM Modi stated that all democracies need to come together to address the rise of Cryptocurrencies so that it does not end up in the wrong hands. And this is where the actual regulation comes in.
Crypto is still evolving and this attribute is embedded in its nature. To keep up with its regulation, the regulator should be proactive as well. What applied yesterday, may not be applicable today and will definitely not be applicable a month from now. The regulator should be well-versed with its mining and functioning and be a step ahead so that it does not slip away from the regulator’s grip.
At the same time, innovation should not be stifled by over-regulation. Crypto should be recognized as the next big asset of the digital world that has the potential to have far-reaching effects on businesses and the macroeconomy of any country.
The regulator should also not give blanket approval to all Cryptocurrencies that are in the market and will very likely come up in the future. Only a few pre-approved Cryptos should be allowed to be listed and traded on exchanges like CoinDCX, Coinbase, and CoinSwitch Kuber. Holding and trading unapproved Cryptos should attract a penalty.
Cryptocurrency exchanges in India also do not fall under any exclusive authority. To be on the safer side, these exchanges themselves follow rigorous KYC norms to safeguard their users. The systems that they have developed are also quite robust. These measures are not, however, the be-all-and-end-all as they are just the first of many steps to protect the user. There have been cases where hackers have been able to access a user’s Cryptocurrency. So, regulation needs to be brought in even for such exchanges. Licenses should be given only after they have proved their mettle in securing a user’s data and money.
These exchanges may be given some teeth with respect to how they regulate activities on their systems since they are the ones with insider knowledge. Waiting for instructions and approvals from a regulatory higher-up may cause undue delay. And in the digital world, even one second is good money.
Limitations may also be imposed on the amount of investment that can be made on the various Cryptocurrencies by individual investors. The need for such a regulation arises due to the fact that a lot of young and earnest investors are getting swept up in the wave of excitement that Crypto brings with it, and they may not necessarily understand the macroeconomic implications that come with such huge investments.
As for the taxation side of the story, a heavy Capital Gains tax, along with securities transaction tax and possible GST, will make the tax rate come up to 40%. This may be done to make Cryptocurrency unfavourable and discourage bulk transactions.
One of the most important decisions that need to be made is if Cryptocurrency can be used as legal tender. If yes, they can be used in the exchange for goods and services and might as well replace the INR in a significant chunk of digital transactions. Just like El Salvador did, digital wallets can be configured to make payments in INR or Crypto with an easy switch between the two depending on what the vendor and buyer prefer. Making Crypto legal tender brings with it other considerations to be made like tax structure changes.
Apart from regulation on the Cryptocurrencies themselves, rules need to be devised on the way Cryptos and their exchanges are being advertised. Just like mutual funds come with risks and various terms and conditions, advertisers and Crypto exchanges can be made responsible for educating their audience and viewers about the risk Crypto carries. They need to be encouraged to provide investor awareness.
Indian investments have usually been very traditional, focused on gold, real estate, fixed deposits, and lately mutual funds. Indian households are known to have the gold of over 25,000 tonnes. For a country that is so used to playing safe with its money, the amount of money it has put into Cryptocurrencies is truly mind-boggling. Crypto investments stand at $7 billion as of May 2021. The platform CoinswitchKuber alone has on-boarded 6 million users in a year, it claims. The users are mostly aged between 18 and 35 who have a huge risk appetite and are willing to take new roads. The daily trading volume has also increased 10X. The nature of the trade and the cheap entry is making it very youth-friendly. Crypto serves as a good training avenue for these youngsters before they start pushing bigger amounts into mutual funds and other investment opportunities once they turn older.
With the demography pushing such steep growth in the Crypto world, India could become the biggest playground for Cryptocurrencies. This rush cannot be curbed, it can only be channelized. It is only going to see an uphill curve as technology gets more and more sophisticated. Hence, what the government needs to do is become a referee in this fast-paced game and make sure no one gets injured, no fouls are committed, and the rule-breakers are penalized.