Why There Is a Need for Regulating the Crypto Industry in India?

The global crypto industry has witnessed a significant boom in its popularity and prices amid its adoption by some major firms and even as a legal tender in some parts of the world. It all started during the Covid-19 pandemic, when the prices of cryptocurrencies surged notably, leaving all the asset classes far behind. While the global economy was falling, this mass adoption and huge inflows into the crypto assets by both the institutional and individual investors raised the demand for investing in these assets. However, it raised investor protection concerns with the financial bodies, which led to the need for regulating the crypto industry.

With massive adoption and huge cash inflows, came risks associated with the privacy and security of the investors such as money laundering, wallet hacking, and much more that can harm an investor. In this year itself, there have been a lot of money laundering and theft cases, such as the Probe Bitcoin case registered in a Delhi court in July 2021 and the WazirX money laundering case in June 2021. These high-profile cases obligated the financial regulators of India to observe the crypto industry closely.

Although, there are numerous possible use cases of cryptocurrencies that are thriving in the market including Bitcoin, Ethereum, Solana, Ripple, and Cardano. If utilized properly under governance in the long term, the pumping and dumping of penny crypto assets is yet another concern in the market. 

This article will answer why and on what grounds some regulations and restrictions are necessary for the proper functioning of the crypto industry in India.

Decentralization Factor: A Boon or a Curse?

Before moving directly to the need for crypto industry regulations in India, let’s understand why there is so much uncertainty in taking any unbiased decision in the matter of crypto assets. 

Cryptocurrencies basically operate on blockchains, which is a ledger technology that allows an individual to execute a transaction with any individual in the world without the need for an intermediary and cross-border transaction charges. This ultimately eliminates the core requirement of a bank or a centrally governed exchange for a transaction to take place.

The exchanges that allow their users to transact without the need of providing their identity and personal details are called decentralized exchanges, such as Uniswap, PancakeSwap, and Sushiswap, as they are not governed by any official authorities. 

Though blockchain technology can be considered the invention of the century because of its technological advancements promises but faces issues due to regulatory uncertainties. 

When there is no official authority involved to take care of investors and participants in the transaction, the rise in corruption, money laundering, and exclusion of the poor section of the society will certainly be witnessed as major concerns. 

General Issues with Cryptocurrencies like Bitcoin

Though cryptocurrencies and, particularly, Bitcoin, challenge the traditional and existing financial system of the nations, with the promise to eliminate intermediaries, there are some significant risks involved while dealing with these assets. They are:

• Security Issues: The first and the most important issue while dealing with cryptocurrencies is that it is not secure. In the past, there have been numerous instances revealing hacked coins and wallet breaches of customers and even of exchanges in some cases. Most recently, over $600 million worth of cryptocurrencies were stolen as hackers reportedly breached Poly Network on August 11. This pushes the traders and investors to trust less on cryptocurrencies and increased demand for protection and security of their money and assets.

The only visible option witnessing the current scenario seems to be either complete regulation or even further decentralization.

• Integrity Questions: As for the stocks, IPOs or Initial Public Offerings are considered the best times for investing in a stock. However, in the case of cryptocurrencies, ICOs or Initial Coin Offerings have turned out to be high-profile scams in the past. Statis Group revealed that over 80% of ICOs conducted in the year 2017 turned out to be scams.

• Clarity Issues Regarding Token Supplies: A majority of crypto assets claim to be completely decentralized, but there have been data revelations that clarified over 80% of the top 50 cryptocurrencies listed on exchanges are held by the top 20 wallets. More surprisingly, in around 16 cases, over 90% of the token supply was held by the top 20 wallets only. This indirectly gives the top holders the position to manipulate the supply and price of the market according to their desires.

• Price Falsification: Although a significant number of crypto exchanges are centralized, they are not completely regulated. Hence, there is a slight space for some shady activities. There have been reports that claim crypto exchanges make use of bots to exploit the price of coins listed on their platform.

• Hacks and Breaches: As the crypto space is not regulated enough, the hackers always have an upper hand over the investors. The absence of a concrete mechanism of trading, dealing, and execution of transactions gives rise to the availability of loopholes in the system. 

Why Does India Need Regulation and Not a Complete Ban?

The fact that there are a lot of issues with the crypto industry, and they have the potential to overshadow the good in cryptocurrencies and blockchain technology, just can not be ignored. However, a complete ban on cryptocurrencies and digital assets in India would only harm the Indian government’s need for technological advancements and the role they can play in revolutionizing the Indian economy. 

The major governing difference between a fiat currency like Indian Rupee and a digital decentralized currency Bitcoin is that the government will neither be able to regulate the crypto market similar to the Indian Stock Market nor will it be able to track crypto transactions. Though, these concerns can be taken care of with the introduction of central bank digital currency (CBDC). These are the digital currency issued by a central bank of a country, which happens to be The Reserve Bank of India (RBI), in the case of India.

With the introduction of CBDC, there would be a growing trust in the digital currency, as it is issued and governed by a central authority, ultimately contributing towards making India a cashless nation. Countries like China, Switzerland, Singapore, Sweden, and Canada, etc. are already in the initial stages of development of their respective CBDCs.

In recent times, India has also been found experimenting with digital payment methods and in a quest of transforming the country into a digital nation, the Prime Minister of India Narendra Modi, announced a new payment method to facilitate seamless transfer of benefits. The government launched an e-voucher scheme, called e-Rupi, which will be delivered to recipients in the form of an SMS-string-based voucher and a QR code through which funds will be transferred directly to their bank account.

India is in dire need of financial upgrades as the banking system, infrastructure, and industries are moving towards digitalization, but the costs will surely put an end to this situation. Hence, banning cryptocurrencies will only block elevation and advancement opportunities for India.

What Would be the Future of Cryptocurrencies in India?

India is definitely a nation with a high appetite for the adoption of technological developments, especially when it comes to financial upgrades and improvements. 

Recently, Nirmala Sitharaman, the Finance Minister of India, indulged in discussions with some notable investors, financial advisors, and the Reserve Bank of India on the topic of cryptocurrencies.

In an article published on the official website of Hindustan Times, it was revealed the Union Finance Minister of India said that cryptocurrencies are a thing of the future, there have been discussions on it, the government needs to be attentive, but they surely can not just ignore the hype around cryptocurrencies. Moreover, for a country like India, there have been worldwide suggestions for developing its own digital currency. 

As far as we can see, there are lesser chances of adoption of any cryptocurrency as a national currency in India, and it is almost certain that the government of India will be launching a CBDC to keep up with the digitization of payments and control in their hands. El Salvador emerged as a classic example of what can happen in India if the government takes similar steps. Sitharaman emphasized the fact that though currently, the government can not act ignorant when it comes to cryptocurrencies, they are not at all ready to accept cryptocurrency as El Salvador did.

In discussions with R. Gandhi, the Deputy Governor of the Reserve Bank of India, it has been revealed that India is not in a state to adopt any cryptocurrency as a legal tender as they are highly volatile and not under jurisdiction.

Possible Solutions for Proper Functioning of Crypto in India

We believe that digital assets like cryptocurrencies, NFTs, collectibles, decentralized applications, and tokens have a long way to go, and they are still in their initial stages. In a wider picture observed internationally, some nations are actively and effectively managing to counter the threats associated with cryptocurrencies and illegal measures linked with virtual currencies. However, when it comes to India, there is an opportunity waiting for entrepreneurs and tech enthusiasts to take initiatives contributing to the development of society with the introduction of blockchain to their respective businesses. 

In accordance with some market experts and veterans, India should categorize crypto assets as a separate class of assets, and work accordingly on their regulations and management. Banning this A-class technology will only hold back India in unlocking its full tech potential and getting a chance of economic enhancement. Here is a list of some suggestions that we would like to share if the government decides to regulate cryptocurrencies to some extent rather than imposing a complete ban on them.

• Regulate Cryptocurrency Exchanges: Even more than the need of regulating cryptocurrencies and their working, there is a need of regulating crypto exchanges, as it is where the retail investor is pouring his money. Earlier, there have been cases where the listing of some coins on crypto exchanges was at exceptionally higher prices than their original price offerings due to which, investors are still sitting on losses.

In addition to this, it should be noticed that the centralized exchanges are not capable of holding and keeping a note of high trade volumes, and that’s exactly what happened at the time of Doge Frenzy. After the bullish outlook on Dogecoin by its promoter and holder Elon Musk, the market went crazy and centralized exchanges were not able to maintain the functioning of their services due to the huge number of trades. Apart from regulations, there is a requirement for technological upgrades in the payment mechanism. 

• Improve Bank-Exchange Relationships: Retail investors are the first ones to react and panic in situations like banks halting providing their services to crypto exchanges. The fear of losing money starts running in the veins of investors, and they look for alternate options to withdraw their money and ultimately causing more fluctuations in the market.

• Allow Listing and Trading of Real and Valuable Assets Only: Due to the rise in the popularity of cryptocurrencies, various fake and worthless currencies have started circulating in the market. Investing in these cryptocurrencies is way too riskier for the investors apart from the volatility part of cryptocurrencies. There is no certainty of those coins not collapsing due to complications in their structure and issues related to their credibility.

Conclusion

We can not deny the fact that India is far behind China, the United States, Japan, Russia, and other nations in terms of technology and financial literacy. The step of adopting cryptocurrencies in the appropriate and decently regulated way will place India ahead of many nations in the list of developing nations. However, in order to do that, awareness related to cryptocurrencies and digital assets need to be raised not even among the common people, but also among the financial caretakers of the country.

Blockchain is a technology that provides us with a chance to mold it according to our requirements and reap the best out of it. Likewise, cryptocurrencies will offer similar advantages in stepping forward the economy.