Cryptocurrencies have witnessed exponential growth over the last five years with more than 15 million Indian investors and as a result, like any other financial asset, the asset class needs to be regulated to protect consumer welfare as well as promote innovation, said a report jointly published by Esya Centre and Observer Research Foundation.

The report highlights that crypto assets are likely to form the basis for future forms of the internet and that India is well placed to capitalise on this due to its burgeoning private crypto market. Given this, it would be unwise to place a ban on private crypto assets as these can result in significant revenue loss to the government and force nascent industries to operate illegally.

Instead, the report advocates a balanced regulatory approach that addresses concerns of fiscal stability, money laundering, investor protection and regulatory certainty while preserving innovation.

According to one of the authors, Meghna Bal, “Most regulatory formulae necessary to address the policy concerns related to crypto-assets, such as investor protection, foreign exchange management, money-laundering and tax evasion, already exist in financial legislation. They just have to be adapted to accommodate an emerging technological paradigm. The recommendations in our report show how this can be done. ”

In India, classifying crypto as a security, good or capital asset could lead to unintended restrictions on investment or leave regulatory gaps in key policy areas. A sui generis crypto framework that adopts the nuances of the crypto industry would be more appropriate and in keeping with emerging global trends.

Suggestions for lawmakers

The report also lays out suggestions for lawmakers on what a crypto regulatory framework should include: it must be technology neutral, innovation friendly and consistent to fully harness India’s potential in this domain. Among other things, the framework must lay down clear definitions, identify the relevant regulatory bodies and create KYC/anti-money laundering obligations, the report says. It should also provide crypto asset service providers with safe harbor – protection from liability for the actions of investors on their platform. This will help asset service providers innovate and scale new crypto-based products and offerings.

The report also recommends the government adopt a co-regulatory approach where industry associations and authorities such as SEBI, the RBI, and the Ministry of Finance share responsibility for oversight. Such an approach takes a leaf out of Japan’s book, where authorities have tasked industry associations to enforce regulations. The report also recommends incentivising industry whistleblowing so that players within the crypto-market work to keep a check on each other’s activities.

Such a facilitative regulatory framework will boost the growth of India’s crypto ecosystem while addressing any possible harms to consumers and society at large, the report says.