Regulators in developing countries around the world have repeatedly expressed concern against the trade of cryptocurrencies like bitcoin. The gold rush, however, remains unabated, attracting many retail investors, and most Indian cryptocurrency exchanges are struggling to meet the demand.
Unsurprisingly, the clamour to introduce a regulatory regime for cryptocurrencies is rising.
Since 2013, the Reserve Bank of India (RBI) has periodically reiterated its concerns over cryptocurrencies but has done little else. Unlike its counterparts elsewhere who have banned or otherwise severely restricted the use of cryptocurrencies, the RBI’s studied silence is arguably progressive in nature, letting the technology play out in the market while the stakes are relatively low.
This has allowed the emergence of a nascent yet vibrant industry in India centred around developing blockchain technology, which underlies cryptocurrencies. However, the RBI’s continued silence (by design it seems), is now stalling the growth of the industry by creating legal ambiguity.
Blockchain technology represents a critical departure from the centralised institutions which currently regulate us today to a more decentralised future. Attempts to gingerly retrofit existing regulations on cryptocurrencies, or other blockchain-based applications, will not only prove to be inadequate but philosophically are an absurd choice.
Today, it is unclear if cryptocurrencies may even be considered financial assets or investments. For instance, India’s finance minister Arun Jaitley clarified in recent weeks that cryptocurrencies are definitely not “currency” or legal tender. Another approach favours interpreting cryptocurrencies merely as “software” and labelling all cryptocurrency transactions as essentially the sale or purchase of software. Although this definition does ring true from a legal standpoint, it is akin to calling currency notes or share certificates paper.
Without clear regulation, the blockchain industry is like a ticking time bomb. Anything from a failed initial coin offering (or ICO, where funds are raised for new cryptocurrency ventures) to a rogue cryptocurrency exchange will result in a public confidence crisis, forcing the government to take a quick decision that may be more politically motivated than it is grounded in reason. This tension has already manifested itself in the form of multiple public interest litigations before India’s supreme court to facilitate state intervention to regulate cryptocurrencies. Court-sponsored interventions, although popular for quick results, are ill suited for a subject like blockchain, which requires considerable original academic thought and investigation.
This begs the question: who should regulate blockchain technology and cryptocurrencies, and how should it be done?
Since different cryptocurrencies can exhibit different properties, broad-brush regulation will prove to be inadequate. Multiple regulators such as the RBI and the Securities and Exchange Board of India (SEBI) will likely have jurisdiction over cryptocurrencies, potentially causing more uncertainty and confusion—and, in some cases, a turf war.
If regulated as a fiat currency, cryptocurrencies will be subject to the control of a central bank as well as, among others, various foreign exchange regulations. Owing to its inherent decentralised nature, enforcing either of these regulations in their current form will be impractical at best. Moreover, regulating cryptocurrencies as a “security” is also a dead-end as very few forms of cryptocurrencies (such as certain ICO tokens) will mirror such features.
Ultimately, being regulated as a “commodity” remains, under extant laws, one of the few viable ways to regulate cryptocurrencies. The US Commodities and Futures Trading Commission, for example, considers virtual currencies as commodities. And its treatment as commodities allows more freedom in dealing with cryptocurrencies as they are regulated less onerously, in comparison to currencies and securities.
This approach, however, leaves much to be desired as the traditional use-cases for cryptocurrencies are more complex and require more nuanced regulation. For instance, there is well-placed concern around blockchain technology being used for money-laundering purposes. And unfortunately for much of the world, bitcoin regulation has been reduced to anti-money-laundering regulation, which as a regulatory response to cryptocurrencies basically misses the plot. In the past ten years it is clear that the cryptocurrency movement has successfully demonstrated both the decentralisation of money as a concept, as well as the durability of the technology that powers it. The cryptocurrency ecosystem is now charging through the mainstream economy, having long grown past its early-adopters. For regulators, therefore, treating cryptocurrencies merely as objects that facilitate money-laundering is an incredibly myopic view of the technological disruption that is well on its way to forever changing our understanding of money.
A progressive example of short-term regulation is being set by Japan and Singapore. The Japanese have quickly shed insecurities around “preserving” the Yen and gone on to declare bitcoin as legal tender without the excess baggage of central bank control on circulation. Having learnt from the infamous collapse of Mt.Gox in 2013 (then Japan’s and the world’s largest cryptocurrency exchange), Japan has mandated cryptocurrency exchanges to maintain capital reserves, restricted co-mingling of customer funds, and implemented stringent know-your-customer procedures. In Singapore, its regulator is offering a “regulatory sandbox” to innovative businesses that wish to raise funds in an ICO. The sandbox approach shows the openness of the Singaporean regulator to work with industry stake-holders in jointly figuring-out and solving for regulatory difficulties by experimenting and learning in a closely-controlled setting.
Howsoever inconvenient, the ideal approach to regulating cryptocurrencies in the long term will be to treat them as an asset-class of their own. While some may be given the status of legal tender, it is unlikely that all the 1400-odd “cryptocurrencies” on the market today will gain acceptance that is comparable to bitcoin. It then becomes imperative to decide what should be the legal status of these other digital assets that are, say, only a store of value, but not a legal tender. Apart from the basics, there will also be a need to build regulations for enabling services such as wallet and storage services, custodian services, KYC norms for investors, brokerage and trading rules for cryptocurrency exchanges, etc.
In the short term, regulating it as a commodity may rock the boat. But in the medium to long term, it is essential that cryptocurrencies and other digital assets are regulated as an asset class of their own. And governments that move progressively and move early will set benchmarks for others.
For most regulators, including the Indian government, it will be essential to develop the right approach. The decentralised nature of blockchain will allow very limited control to any centralized institutions, and their seamless application across borders will also make it difficult for a solitary government to regulate it as per its own whims and fancies.
But blockchain networks are built on widespread consensus and any effective regulation will also be through consensus—at least amongst major world governments. As a rising global power, India has both the responsibility and the influence to move regulations in a manner that suits the developing world.
If the rise of bitcoin or other cryptocurrencies are anything to go by, it is clear that bans or other stifling measures will be difficult to enforce. Regulators are already finding it tough to adjust to the new world order and let go of the absolute control they are so used to exercising. Regulatory models will either have to evolve, or as the Bitcoin community puts it, risk getting #Rekt!
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