The scalability of fintech depends on the adaptability of the legal system. India, with 93 million cryptocurrency owners, ranks first globally. However, India isn’t among the top 20 countries for favorable crypto regulations. Establishing a favorable legal regime is crucial for India’s market development, especially with the middle class projected to reach 90% of the population by 2039.
Market regulation involves state control, which conflicts with the decentralized nature of blockchain technology (DLT). The challenge lies in balancing transaction freedom and state oversight, as currency issuance is a sovereign function.
Current uses of blockchain technology in the cryptocurrency market
1. Cryptocurrency payments between users, which can be conducted through wallets, cryptocurrency exchanges, and brokers, including operations with stablecoins.
2. Trading on centralised cryptocurrency exchanges.
3. Fundraising for projects through Initial Coin Offerings (ICO) and Initial DEX Offerings (IDO).
4. Trading derivative financial instruments based on cryptocurrency assets.
5. Operations with Non-Fungible Tokens (NFTs) and the confirmation of ownership of unique digital objects, such as images, videos, audio files, or gaming items.
6. Using crypto applications and platforms based on DeFi.
[Cryptocurrency Regulatory Framework]
In March 2020, the Supreme Court of India lifted the cryptocurrency ban. Following this, the government introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. This bill, currently under revision, aims to recognize cryptocurrencies as regulated assets under the Securities Exchange Board of India (SEBI).
The current regulatory status remains undefined. On behalf of the Ministry of Finance, the Minister of State for Finance, Shri Pankaj Chaudhary, stated: ‘Crypto assets are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation on the subject can be effective only with significant international collaboration on the evaluation of risks and benefits, and the development of common taxonomy and standards.’
The primary objectives of establishing a favourable legal regime are, on one hand, to ensure the protection of the rights and legitimate interests of investors who use DLT technology for transactions and, on the other hand, to safeguard the state against the use of cryptocurrencies in financing terrorism, tax evasion, and other illegal activities. Therefore, the regulator must develop a framework that addresses the following tasks:
1. Define the legal status of cryptocurrencies, which may include categorization as securities, commodities, and more.
2. Establish a licensing mechanism for cryptocurrency exchanges and payment systems to protect investors against fraud.
3. Implement transparent procedures for customer identification and compliance with anti-money laundering regulations.
4. Develop a favorable tax regime competitive with other jurisdictions, making India attractive for launching startups and crypto projects.
According to Kar Yong Ang, an Octa broker financial market analyst, ‘The most important issue that the regulator needs to consider is the digital asset regime that includes cryptocurrencies. Suppose the tax rates are high (more than 5%). In that case, most of the persons performing transactions with cryptocurrencies will continue to remain in the grey zone, which, on the one hand, will reduce tax revenues and, on the other hand, will increase the risk of scam and fraud for cryptocurrency users.’