Key Takeaways
- For India to position itself as a leader in the global cryptocurrency industry, several key aspects need to be addressed.
- These include protecting inventors, preventing financial crimes, promoting innovation, and monetary sovereignty.
- Further nuanced policy solutions are required to meet these challenges that international frameworks cannot solve.
Some nuanced policy solutions are required to meet these challenges that international frameworks simply cannot solve.
India has created history by topping the Chainalysis Global Crypto Adoption Index for three consecutive years. Policymakers are celebrating. Industry leaders are posting congratulatory threads on social media.
Such an achievement would ideally prove that India is ready for the age of decentralized finance.
And yet, we have a long way to go.
Understanding India’s Crypto Growth Story
According to the India Web3 Landscape Report, India now hosts over 1,200 Web3 startups that have attracted more than $3 billion in funding. Indian developers’ share of global Web3 projects grew from 5% to 12% over the past decade.
While this is a number that we should be proud of as an industry, most of our best developers are building products for foreign markets because Indian regulatory ambiguity makes domestic deployment commercially unviable.
We have a similar case for crypto adoption in the country as well. In 2022, the government imposed a 30% flat tax along with a 1% TDS on every transaction, with no ability to offset the losses against the profits. This was one of the first sets of regulations that came in from the government and was meant to legitimize crypto in India.
However, a different story took shape. About 90% Indian crypto traders moved to offshore exchanges after this move. This not only impacted the crypto platforms building for India, but also impacted the government revenue.
A report by the Esya Centre that came out a year after the tax laws were implemented estimated that the cumulative uncollected TDS from offshore exchanges exceeded ₹6000 crores.
But when you look at this from a zoomed-out perspective, this whole process is working towards removing speculators from the market while encouraging a long-term investment mindset.
It wouldn’t be wrong to say that a similar process helped place the Indian equities market among the top markets in the world.
Assessing the Regulatory Gaps
In my opinion, the ask from crypto investors and even some of the industry participants is wrong. At this point, the industry is asking for a dedicated regulatory body for crypto, just like SEBI or RBI. But here’s the problem with the ask.
Crypto is a vast asset class. It has multiple aspects, layers, and use cases that simply cannot be regulated by a single regulator. Having a single regulator would restrict the potential that crypto has not only as an asset, but also as a technology.
What India’s Counterparts Are Doing?
In a way, it is actually a good thing that crypto regulations in India are slow. This gives us time and the chance to learn what works and what doesn’t work from our global counterparts and make amends to the structure in a way that best fits the needs and priorities of the Indian crypto users.
Some of the valuable lessons for India’s regulatory journey come through international experience. A comprehensive framework for crypto asset classifications and issuer obligations is being implemented by the European Union’s MiCA regulation.
Through this unified approach across 27 member states, it is demonstrated how consistent regulation can reduce compliance costs while ensuring investor protection.
Another model that is worth studying is offered by Singapore’s regulatory framework. Detailed guidance on risk management and customer protection is provided by the country’s Payment Services Act.
At the same time, they also have regulatory sandboxes that allow controlled testing of new technologies, creating feedback loops between regulators and market participants.
However, when it comes to financial markets, the job of a regulator across countries differs from one another and is largely difficult. They need to prioritize investor protection while also creating an environment that allows platforms to innovate and grow. In the case of crypto, this process gets highly complicated.
A crypto regulator needs to protect investors, foster innovation, prevent users from misusing platforms for illicit activities, and implement numerous checks and balances to maintain a healthy ecosystem. And this process will take time.
Building India’s Responsible Crypto Regulations
Over the next five years, the following scenarios are possible, considering the evolving government stance. Crypto will be divided into different segments, Bitcoin will be treated as a store of value like gold, stablecoins will be viewed as a mode of cross-border money movement, and other tokens like Ethereum, Solana, and XRP will be treated as utility tokens.
This simplifies the process of regulation. Just as we have different regulators under the umbrella of finance (SEBI for securities, IRDAI for insurance, and RBI for banking), crypto should also be addressed by creating separate segments.
For instance, governance tokens like UNI from Uniswap are used to vote on decisions within a decentralized protocol, not for profit. If such tokens were taxed or regulated as property, every on-chain vote could be seen as a taxable transaction, which would be impractical, as no money is actually being made.
A similar case would come up for stablecoins, where it is largely being used for cross-border transactions rather than making profits. Such use cases greatly benefit India by bringing down the cost of moving money by up to 90%, but cannot be taxed as an investment.
Building a Mature Market in India
For India to position itself as a leader in the global cryptocurrency industry, several key aspects need to be addressed. These include protecting the inventors, preventing financial crimes, promoting innovation, and maintaining monetary sovereignty.
Some nuanced policy solutions are required to meet these challenges that international frameworks simply cannot solve.
By having clear disclosure requirements, segregation of customer assets, and deposit insurance for compliant platforms, we could build public trust towards the asset class.
More importantly, educational initiatives about crypto risks and benefits would empower informed decision-making. Investor suitability assessments could protect retail participants from excessive risk exposure.
These are some simple but most effective ways to ensure that we build a mature market in the long run.
The views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to CCN, its management, employees, or affiliates. This content is for informational purposes only and should not be considered professional advice.
About the Author
Edul brings over 15 years of experience across finance, technology, and entrepreneurship. An alumnus of IIT Bombay, he previously co-founded Niffler (acquired by Tapzo) and later served as Product Head at Tapzo (acquired by Amazon). He has a proven track record of building tech-first companies and is now leading one of the most exciting fintech startups in the digital asset space.
