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Has crypto adoption spread too far for politics to ignore?

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Has crypto adoption spread too far for politics to ignore?

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Anecdotal evidence suggests that cryptocurrency trading and investing is spreading rapidly in India. While the numbers are not reliable, here are some proofs. The largest digital stockbroker Zerodha has 7 million accounts, while crypto exchange WazirX has 8.5 million accounts and Coinswitch Kuber has 11 million accounts.

Of course, capital accounts run into the millions, and WazirX and Coinswitch can have overlapping members. But the rate of growth is important. Chainalysis, the blockchain data platform says that crypto adoption grew by 881 percent in August 2021, over the previous 12 months. And India, along with Vietnam, ranked as one of the fastest growing markets.

If adoption is widespread and growing, the question to ask is: Has crypto adoption spread too far for policy makers to ignore? Now this raises a couple of sub-questions:

First:

Are Indian lawmakers ignoring regulation of cryptocurrency exchanges, traders and investors? The answer is yes. The CBDT taxes the income or earnings of cryptocurrencies. But there is little else by way of regulation. The RBI in 2018 told the bank not to have trucks with virtual currency exchanges or traders. That circular was overturned by the Supreme Court in 2020. Separately, the government said in February this year that it is enacting a law to ban all private digital currencies and recognize only state-backed virtual currencies, but it has not been shared. nothing about the current state. of that law. Hence, as of now, cryptocurrency exchanges, traders, and apps are not fully regulated. To the extent that they use the banking system, banks carry out controls against money laundering. But the exchanges themselves are not regulated and have no obligation to report to any authority.

Second: If cryptocurrencies are not regulated, can a collapse in, say, bitcoins or other currencies, and the resulting defaults destabilize the financial system? Most Indian bankers say it is unlikely. Bankers claim that no bank in India accepts crypto as collateral for loans, nor does they provide margin funds, given the RBI’s well-known anathema to this asset class. So hypothetically, if bitcoin crashes to say $ 10,000, no bank in India would get hurt. Some young people who may have taken out personal loans or borrowed on their credit cards to gamble on these exchanges may default, but these are likely too small for the banking system. This argument seems compelling, but you can’t be sure where any leverage might lurk.

This raises the question: How are other countries handling it? Many developed and emerging economies have moved proactively to regulate cryptocurrency players in their jurisdictions. An important point to keep in mind here is that commerce itself cannot be regulated because blockchain like the internet lies beyond and outside of national governments. National governments cannot regulate the Internet itself. They can set rules about which websites can be blocked or how they can penalize people who use them for the wrong purposes.

Reaching out to jurisdictions that have been more open to cryptocurrencies – Singapore, Japan, European Union countries, and the United Kingdom – all have recognized cryptocurrency trading, although most do not recognize it as legal tender. The regulation in these countries has the following elements:

  • Most require crypto exchanges to be registered with the securities or commodity trading regulator.
  • These exchanges must adhere to strict Know Your Customer (KYC), Anti-Money Laundering (AML), and Anti-Financing of Terrorism (CFT) rules.
  • They are taxable, such as property, capital gains, or business income.
  • It is important to note that most do not allow exchanges or their financial entities to offer leverage or derivatives trading.
  • For a group of countries that have recognized crypto trading, there is a significant group that remains ambivalent: the US, China, and India among them. The US Securities and Exchange Controller or SEC has penalized many cryptocurrency exchanges, brokers, and platforms for specific products that it says are securities and therefore must follow securities law. But the SEC has not defined when or what it calls securities, with respect to cryptocurrencies.

    The US government came close to recognizing cryptocurrencies by passing the $ 1 trillion infrastructure bill when it said that taxes from these entities can generate $ 28 billion over the next 10 years to fund infrastructure, but the bill ultimately did not tax them.

    One reason that policymakers in India, China, and the US do not explicitly define, prohibit, or allow cryptocurrency trading could be the fear that the very act of regulation could vastly increase the number of investors who they believe their money is safe as the government is regulating; And then if there is a severe drop in these assets, a large number of investors can be hurt. Non-banks, most of which are lightly regulated, may also be affected, generating a systemic disruption.

    Ronit Ghose, Citibank’s global director for banking, financial technology and digital assets, says it is unlikely that the declines in cryptocurrencies could have a systemic impact. He calculates that while the total value of cryptocurrencies in the world is approximately $ 2.5 trillion, the total capital investments in the world amount to $ 130 trillion, the total financial assets can reach $ 400 trillion and including property, much more. Therefore, it is unlikely that there is a threat to the financial system from this $ 2.5 trillion asset class.

    But some central bankers are not so sure. Similar math would have been true for Lehman Brothers as well. Some veteran central bankers worry that cryptocurrencies have grown too large and could jeopardize the system. They also believe that this asset class appears to be on the verge of expanding and it may not be possible to reject them.

    For the moment, the only alternative is to educate traders and investors on the volatile nature of the asset class, even as financial regulators are on the lookout for any potential impacts on banks and non-bank financial institutions. Separately, perhaps supranational bodies like the IMF, the BIS and the FATF should step into action and prepare some ground rules that all nations can follow. But that, again, maybe a catch-22. The more rules that are written, the faster the number of adherents to cryptocurrencies can grow, the less likely national sovereigns will be able to regulate this supranational asset class.


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