The past few years have witnessed a dramatic rise in the popularity of cryptocurrencies around the world, with some touting them to be the ‘digital currency of the future’. In fact, in 2018 Christine Lagarde, the Managing Director of the IMF at the time, compared its disruptive potential to the internet itself.
While such proclamations might be premature, it is important to acknowledge their growing importance and ability to reshape global finance and banking and therefore, assess its full impact and potential on the Indian digital economy.
Over the past year alone, the price of Bitcoin has multiplied more than six times, and despite its volatile nature it is widely being viewed as an investment “asset” by businesses as well as retail investors. Its growing popularity has been powered by cryptocurrencies’ main value proposition of a decentralised platform which ensures transactions with transparency and strong privacy enabled by blockchain technology. This is underlined by the overall market value of cryptocurrency exceeding $2 trillion this year, with estimates suggesting that seven million Indians invest and trade in crypto assets valued at over $1 billion.
However, its exponential growth has also resulted in the focus turning to some of the perceived deficiencies in this developing technology. One major concern revolves around the volatile nature of crypto, exacerbated with the rise of ‘alt coins’ which critics point out can often resemble Ponzi schemes.
Cryptocurrencies are also being looked at as a source of money-laundering and its inherently decentralised nature making it far harder for authorities to regulate. Other arguments against the viability of crypto currencies point towards the security risk they entail, as well as the current lack of a solution when it comes to ensuring its effective inheritance. These are also concerns around possible asset bubbles around such currencies due to over-leveraging with possible newer types of derived products.
While these concerns and challenges do have some merit, it is natural for issues to emerge with the rise of newer technologies. This rise has also resulted in cryptocurrency networks strengthening their measures to mitigate such issues.
For example, the furore around cryptocurrencies being used as a primary mode of money laundering and illicit activity has been partially negated by the integration of anti-money laundering measures such as fraud detection and flagging of suspicious transactions.
While the UN estimates 2-5 per cent of global GDP stems from illicit activities, criminal activity represented just 0.34 per cent of all cryptocurrency transactions in 2021 — a reduction from 2.1 per cent in 2019. The other major concern around price volatility and its effect on retail investors is perfectly valid, and this is where enabling regulation can play an important role in educating as well as protecting potential investors.
When it comes to the regulation of cryptocurrencies in India, it is important for policymakers to acknowledge the challenges discussed while simultaneously adopting a solution-based approach to any regulatory framework. Over the past few years, the Indian government’s position around crypto has seen multiple shifts.
The first formal restriction on cryptocurrency transactions was put forward by the RBI in 2018. This circular prevented banks and financial institutions from enabling transactions with cryptocurrency platforms and virtual currencies.
To add to this, in 2019, a Parliamentary committee formally recommended against regulating cryptocurrency and pushed for it to be banned.
However, a Supreme Court decision on this matter in 2020 gave crypto traders and investors great relief, while another encouraging sign was when Finance Minister Nirmala Sitharaman acknowledge its growing potential and the need for a “calibrated approach” towards its regulation in her Budget speech this year.
Despite these positive signs, there has been recent disruption in the services of cryptocurrency exchanges in India with several banks disabling payment gateways from processing transactions towards cryptocurrency platforms in the country.
This recent disruption has stunted the growth of businesses, as well as created a barrier to investment opportunities for Indian consumers.
The issue is particularly relevant considering the exponential increase in the popularity of cryptocurrencies, both in terms of trading, as well as an investment asset. This factor is underlined by the overall investment in cryptocurrencies in India increasing by 317.2 per cent over the course of 2020, according to a report by YCharts.
The growth in interest and investment in cryptocurrency has also been reflected in the rise of multiple Indian cryptocurrency trading platforms, led by the likes of WazirX and CoinDCX.
Another prominent example is Polygon, a blockchain scalability platform which helps reduce transaction time and fees across ethereum networks and is founded by three Indians who are being billed as ‘India’s first crypto billionaires’. These platforms are generating foreign investment, as well as creating employment and growth opportunities for Indians.
It is advisable for the government to take advantage of the opportunity presented and acknowledge the important role that cryptocurrency is going to play in the future. The Centre and NITI Aayog must get into the act quickly to develop an enabling framework that involves a steady process of in-depth research and stakeholder consultation for regulation of crypto trade.
India must not waste this opportune moment to move towards a progressive form of regulation which protects consumers while ensuring optimal growth and innovation for cryptocurrencies and the ancillary industries that will emerge around it.
The writer, an advocate, is a Member of Parliament, Rajya Sabha from Odisha, and a former CAG bureaucrat