Finance Minister Nirmala Sitharaman recently said that the government is going to take a calibrated position on cryptocurrency. The minister also said the government wants to ensure that there is a window for experiments in the cryptocurrency space. But the cryptocurrency platforms or exchanges in India are fearing a complete ban on trading. The new bill, moved by the government, is likely to propose a framework for digital currency to be issued by the Reserve Bank of India.
While a ban on private crypto currencies will kill all future innovations in the crypto space, the virtual currencies do need a regulatory framework to protect the interest of investors. So what should be regulatory framework for crypto currencies, and why is a need for regulations. Let's look at the five major areas that need attention.
Classification of cryptocurrencies as digital tokens and tradeable assets
There is a need for clear classification of cryptocurrency in India. These virtual currencies are not a legal tender backed by the central government or the RBI. The Indian crypto players are also asking for treating crypto assets as financial assets like debt, equity or a commodity.
Regulations for investor protection
Like any other financial asset, the value of a virtual assets is also prone to market manipulation and price volatility. In the last few years, the prices of crypto assets have seen wide fluctuations. Take for instance, the price of Bitcoin fell to $47K last month, but again climbed up to $57K in March. There are also chances of mis-selling the crypto assets as investor awareness is very low. There is a need for disclosure of underlying assets, their performance, adoption, the future potential and risks associated with virtual currencies.
Allowing select well-known crypto assets
There are some Indian platforms that are offering more than 300 crypto assets for trading. Globally, there are thousands of crypto assets. Today most investors only know about Bitcoin, Ether or Ripple, but nobody knows about these hundred and thousands of virtual currencies. A regulatory authority clearing the crypto assets is needed.
Understanding the technological risk
There is a big risk of technological changes that could even make the blockchain obsolete in future. Given the pace of changes and disruption, the value of digital assets or buying digital assets for long term requires the asset class to remain relevant for a long term. There is a need for creating information infrastructure and certified financial advisors trained in crypto assets.
Cyber security risk
There is cyber security risk and chances of online fraud in case of cryptocurrency as entire investment or wealth is stored virtually. Globally, hacking is a major threat today for banks and institutions. Even the most secured US Federal Reserve, the US Central bank, has seen hundreds of cyber attacks in the last decade. A cyber attack could result in losses for investors who have put their savings in crypto assets.
Money laundering concern
Governments globally are worried about terror financing through cryptocurrency. An unregulated system has the potential to fund illegal activities. Today , the crypto exchanges need large investments in technology to detect any suspicious transactions. A bank like KYC or customer due diligence is needed to verify location and identity investors. There is a need for strong penalties for any violation of KYC guidelines.