India needs to have progressive regulation for crypto assets: Experts

Blockchain technology is needed and can be used in governance, they say

Regulations and restricted trading are among the solutions experts are debating for India’s cryptocurrency industry which is uncertain about its prospects after the Finance Minister last week said the central bank favours banning the digital asset.

The finance ministry two years ago said it proposes to promote and regulate blockchain, the technology that maintains a decentralised record of cryptocurrency transactions, but there has been no progress. Some experts proposed a progressive approach to blockchain and the cryptocurrency industry.

“The combination of computer code and human involvement is what makes blockchains unique. Just putting your faith in computers isn't enough. Computers aren't flawless. There must be ways to keep persons or solutions built on blockchain accountable for the technology to be broadly and intelligently employed. Government cannot control blockchain but the applications built need to be in conformity with security and data privacy protocols,” said Mayur Zanwar, cofounder at TruScholar, a blockchain platform.

Another industry official said the government can begin by ensuring that the servers of cryptocurrency firms are in India and that blockchain is used for legitimate activities. The government’s indirect measures of TDS (tax deducted at source) and income tax on cryptocurrency trading have prompted participants to shift their base away from India.

Jaydeep Reddy, leader, technology law at Nishith & Associates, proposed progressive regulation. He cited the examples of Maharashtra State Board of Skill Development using the Ethereum blockchain to verify diploma certificates and the Norwegian government’s announcement that it will use the same technology to set up a capitalisation platform for unlisted companies.

"A progressive regulatory approach towards crypto-assets is therefore in our view essential to foster blockchain use-cases,” he said.

Experts said there is a need to bridge the gap till the government’s proposal for global coordination on cryptocurrencies is accepted.

Rashmi Deshpande, who has worked intensively on crypto regulations and is a partner at Business Law Chamber, suggested setting up a regulator for India’s cryptocurrency industry. “While the government is keen on getting into a coordinated effort on a global level to take a call on crypto assets, the RBI is of the firm opinion to bring in a ban. However, both options at this stage seem extreme as the global community is yet to act on a consensus,” she said.

"Therefore, it will make sense to bring in a regulatory watchdog for the sector so as to ensure that as long as the international efforts are not coordinated at least the regulatory authority will take care of the interest of all stakeholders including the crypto asset businesses along with the millions of consumers in the country.”

Siddharth Sogani, managing director, CREBACO, a rating agency for blockchains and crypto exchanges, said that blockchain and crypto should co-exist. “We have proposed to the government to permit ‘close loop exchange’ mechanism.”

Under this mechanism, exchanges will allow investors to send money to buy and sell cryptos and get proceeds but they cannot take delivery. To prevent 'dabba trading' (informal/unofficial trades), exchanges will have to actually buy/sell crypto when investors place a buy/sell order with exchanges, similar to exchange-traded funds. A custodian will audit crypto trade of exchanges and ensure they act only as a service provider for investors.

China doesn’t allow crypto trading but peer-to-peer trading is permitted. Peer-to-peer trading takes place on Indian exchanges but volumes are thin.

Tales from the ‘Crypt’o

• Two years ago, the finance ministry had said it was looking to promote and regulate blockchain
• The combination of computer code and human involvement is what makes blockchain unique
• An industry official said that the 
• Centre can begin by ensuring that servers of crypto firms are in India and that blockchain is used for legitimate activities
• To prevent dabba trading (informal/unofficial trades), exchanges will have to actually buy/sell cryptos
• China doesn’t allow crypto trading, but peer-to-peer trading is permitted