Cryptocurrencies have generated an unprecedented media frenzy in the past few years. The widespread adoption of Crypto and other digital assets has polarised opinions in all directions, with some opinions believing it to be the future of our monetary systems and some other opinions believing that cryptocurrencies, in general, form a threat to the economic functioning of our society. India, with its large population, has proved to be a sizable market for crypto investors and exchanges alike. The meteoric rise of crypto has seen the number of investors reach the staggering figure of 20 million, with a majority of these investors coming from tier-2 and tier-3 towns. It is in this specific context that the issue of investor protection assumes paramount importance. But the foundations of a robust investor protection regime have to be based on regulatory clarity. Unfortunately in India, the waters around Crypto regulation remain murky. While the Union Budget for 2022-23 did clarify taxation on digital assets at the rate of 30 percent, the punitive nature of the measure left investors shocked. The journey of cryptocurrencies in India has seen a lot of ups and downs and several questions need to be answered. Issues such as classification and regulation of Crypto, its legal aspects, and much more were discussed at the session on Crypto regulation at The India Law Forum organised by The SKOCH group. 

Issues around Cryptocurrency: A review
The discourse around cryptocurrency, particularly in India has been clouded by heavy advertising and promises of getting rich quickly. However, there is a need to center this discussion by highlighting some of the fundamental issues associated with cryptocurrency that have been on the minds of policymakers and civil society for a long time. The first issue is what are the unintended and harmful consequences of the widespread adoption of crypto. There have been doubts about how Cryptocurrencies can be used as a tool for illegal activities such as money laundering and tax evasion and perhaps even more serious crimes such as terror financing. The issues around cryptocurrencies have widespread ramifications transcending geographical boundaries. This issue was highlighted by Baroness Sandip Verma, Member of the House of Lords, United Kingdom. She said, “ We don’t have clear global recognition treaties or legislation that we’ve always signed regarding crypto, so I think there’s a lot more work to be done around addressing some of the unintended consequences of cryptocurrency and agree upon the fact that there is a need for some regular international agreements around this issue”.

The second issue is how governments and policymakers tackle the flummoxing question of Crypto regulation & Investor protection. There is no contesting the fact that a large number of investments in cryptocurrency in India have come from people who might not understand the risks associated with it. Due to its volatile nature, cryptocurrency investors run the risk of running into huge losses leading to a replay of the chit fund scams. In a scenario where there is no existing regulatory mechanism to safeguard investors’ rights and protect them, the burden of protecting gullible investors from financial rout might fall again on the shoulders of the taxpayers. The meteoric rise of crypto in India has also stopped the government from taking a concrete decision on it. Apart from taxation, there has been no decision so far on private cryptocurrencies. There are also doubts about the capacity of existing regulators such as the RBI and SEBI if they can effectively manage the rapidly evolving nature of cryptocurrencies. The present approach of the government seems to be to gauge the response to a government-issued CBDC and then take a call on private cryptocurrencies. Dr. Amar Patnaik, Member of Parliament, Rajya Sabha also talked about the question of regulation and said “ I’m very certain that the RBI will come with a CBDC because that would actually act as a regulatory sandbox to see how it plays out and then maybe they will get into the issue of private cryptocurrency but there is a lack of time because of the rapidly changing situation”

The third issue is around the separation of blockchain from cryptocurrencies, it has been forcefully lobbied from different quarters that any regulation on crypto will also kill innovation for Blockchain, which forms the technological backbone of Cryptocurrencies. There is a need to divorce the issue of crypto regulation from the development of blockchain. There is a lot of noise interlinking crypto and blockchain but in due course of time blockchain will become a technological component with diverse uses in areas such as smart contracts, banking, insurance, government benefit transfers to citizens, and much more. Mr. Utkarsh Sinha, Managing Director of Bexley Advisors also spoke on the issue and said “A lot of the blockchain companies that emerged from this clutter on the other side, will be the kind of companies that are fundamentally able to reshape how we do business globally and generate long term value”.

The fourth issue is around the legal status of private cryptocurrencies in India, the discourse around private cryptocurrencies in India has swayed continuously in different directions with calls for legalisation on one side and complete bans on the other. There has to be a balanced and rational approach to deal with these issues. Regardless of a ban, crypto and related assets will continue to exist and a complete ban might only give rise to an alternate Blackmarket over which the law enforcement agencies and the governments might have no control. Mr. Matthew Kimber, Lawyer, Law Commission Of England And Wale Commercial And Common Law also shared his skepticism about the result of total bans and said: “ that crypto assets would exist, irrespective of any legislation or regulation because of the perceived value that the traders or consumers find in them”. The best approach here should be to observe how the scenario regarding the adoption and development of Crypto assets pan out and then make an informed decision. 

Recommendations:

The panelists deep-dived into multiple issues surrounding cryptocurrencies and made the following recommendations:

• The official stance on crypto in India has seen a 180 degree turn from unstated acceptance to punitive measures, there has to be a centered approach to deal with this issue 
• Ramifications of widespread use of crypto are not limited to any particular geography, there has to be greater international cooperation between governments to come up with a more holistic approach
• There is an urgent need for an international order to be set up on crypto because national authorities can not deal with the cross-border challenges crypto presents
• How an RBI issued CBDC will play out can be used to solve some of the regulatory issues around private cryptocurrencies, but this is a rapidly evolving situation and urgent action is needed
• There is a need to separate cryptocurrencies from the development of blockchain technology, blockchain can continue to develop in its own right with widespread uses in almost every area
• A complete ban on cryptocurrencies will not be possible for the law enforcement agencies to enforce, a more suitable approach would be to have a robust regulatory framework that takes into account the technological and legal challenges associated with governing crypto assets
• There is a need to rethink customer protection mechanisms in India to include threats to customers’ interest from challenges such as crypto. Regulation and customer protection need to work together to protect citizens in the best way