Multi-Pronged Regulations Answer To India's Crypto Problem, Not Blocking Transactions: Experts It's high time the Indian government solved the regulatory labyrinth, as per industry stakeholders, in order to not just safeguard investor's money but also provide a clear direction to financial institutions

In a notable move that will further streamline cryptocurrencies, S&P Dow Jones recently launched three indices linked to Bitcoin and Ethereum, two of the most popular digital tokens, with the list expected to expand to include other digital coins by the end of the year.

Meanwhile, back home in India some of the major banks are severing ties with crypto exchanges and other entities directly involved with the digital assets. The country's largest private sector lender ICICI Bank has directed some payment gateway partners to block transactions with merchants facilitating buying or selling of cryptocurrency. This step is similar to Reserve Bank of India's (RBI) 2018 directive that disallowed banks and non-banking financial institutions under its ambit to carry any type of crypto-related transactions. The Supreme Court had set aside RBI's circular in March 2020.

It's high time the Indian government solved the regulatory labyrinth, as per industry stakeholders, in order to not just safeguard investor's money but also provide a clear direction to financial institutions.

"They're (S&P Dow Jones) acknowledging the fact that many of the world's leading companies already see crypto as a legitimate and respectable asset class that investors should at least watch, if not diversify into," said Vikram Rangala, COO, ZebPay. "It's high time India's financial community caught up to the US, tapped into the thousands of crores of economic opportunity those indices represent and acknowledged publicly what they are already saying in private."

Need for a multi-pronged approach

A multi-pronged regulatory approach is the answer to India's crypto problem, as per industry experts. Navin Surya, chairman, Fintech Convergence Council, which is part of Internet and Mobile Association of India (IAMAI), suggested that India should formulate three separate laws for cryptocurrencies.

One, to manage and regulate trading of cryptocurrencies through crypto exchanges. Surya said if the government fears cryptos then they should fear futures and options (F&Os) more as they are equally speculative. "If we are able to handle sophisticated trades like F&Os, why can't we handle crypto trading," he said. "This would include devising rules for exchanges wherein they properly track and trail people trading on the platforms, ensure KYC and AML (anti-money laundering) compliances are done and bring exchanges within the control of regulators, such as Sebi (Securities & Exchanges Board of India)."

Second part is about Initial Coin Offerings (ICOs). "These are like electronic securities, just how shares are issued during an IPO," Surya explained, adding that this is similar to doing an IPO and raising funds and should fall under the purview of Sebi. "In place of issuing shares in a demat account, tokens are issued that are linked to a company's growth, progress and profitability. So, this (ICO) can follow a similar regulatory process to determine who can issue these tokens, what are the terms, how the funds are raised and used, where the funds are kept, etc."

Third is allowing crypto as a payment option, which squarely lies with the RBI.

"These three subjects need three different committees independently instead of attributing a blanket definition. Perhaps, the first two can be clubbed as they fall under Sebi's scope but the third one is a completely different subject," Surya said.

Globally, countries are following similar nuanced models to regulate digital tokens in their respective jurisdictions.

Singapore is a case in point. The country's financial regulatory body Monetary Authority of Singapore (MAS) has dealt with crypto as different categories of asset, security and payment to bring out regulations under the Payment Services Act, 2020. Further, Singapore has regulated issues of digital coins under a separate securities and futures act. MAS has not only regulated the digital assets ecosystem to monitor risks of money laundering and terrorist financing associated with crypto activities but is also partnering with blockchain technology companies and financial institutions to explore innovations in inter-bank payments using blockchain technology.

The Indian government can follow suit and introduce a regulatory sandbox for startups to innovate, says Edul Patel, co-founder and COO, Mudrex, a digital asset exchange and a platform that allows cryptocurrency traders to automate trading strategies. A regulatory sandbox will provide supervised space to test various technologies, understand their use-cases and how they can pose certain regulatory challenges.