The steep rally in the price of crypto assets such as bitcoin, etherium, dogecoin and solana since the US Presidential elections, highlights the exigent need to frame a regulatory framework to govern this asset class. Bitcoin, the bellwether crypto asset, has gained over 33 per cent in the days following the victory of Donald Trump, taking it to a life-time peak of $91,000. Trump’s campaign promise to make the US the crypto capital of the world had no small role to play in this..

Along with his sons Trump recently launched a crypto business, World Liberty Financial, and even stated that he will make crypto assets part of the official reserves of the US. With hopes of a more benign Securities and Exchanges Commission under Trump, crypto lovers have begun adding to their crypto holdings this month. The problem is that the fundamental risks associated with crypto assets remain unaltered — namely, that these assets have no intrinsic or underlying basis and the price is driven only by the demand. There is no recourse here for investors as the creation, mining and maintenance of most of the larger crypto assets is done by nameless computer programmers spread across the globe. Lack of regulatory supervision leads to the potential misuse of crypto assets for money laundering, drug trafficking and terror financing.

Even so, volumes on crypto trading platforms in India have risen manifold since the US elections. Crypto asset trading had collapsed over 80 per cent in 2022 following the levy of high taxes on transactions. But India, unlike China, has not altogether banned trading and mining of crypto assets. While high taxes had curbed trading activity in India, investors continue to trade in a regulatory vacuum on Indian crypto trading platforms. These platforms have come under the Enforcement Directorate’s scrutiny for money laundering and foreign exchange violations. Allowing them to function without regulatory supervision could jeopardise financial stability. The FTX exchange fiasco in 2022 that led to the collapse of Silicon Valley Bank suggests that an outright ban on these assets may lead to drastic consequences. Global regulators are now veering towards allowing trade in these assets, but under stringent domestic regulation.

The Centre should shed its ambivalent stance on crypto assets now. If it does not wish to ban them altogether — which will be a good decision — then it should quickly adopt the IMF roadmap for regulation, adopted at the G20 summit in 2023. The first step is to identify a regulator of crypto assets who will frame regulations for issuance, trading, investor protection, risk-management and governance. The crypto-asset service providers will have to meet Financial Action Task Force standards in maintaining documents and reporting suspicious transactions to the authorities. Acknowledging the existence of cryptos and regulating them is better than a ban which will be difficult to implement.