REGULATING CRYPTOCURRENCIES

Description

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Context

A law to regulate or ban cryptocurrencies can only be effective once there is some form of international agreement in place, the Finance Minister said.

Read: https://www.iasgyan.in/blogs/cryptocurrency-pros-and-cons

Reasons why Crypto currencies need to be regulated

Prevent market manipulation and protect investors

Market manipulation and price volatility are common in cryptocurrencies. Take, for example, Bitcoin, the world's oldest and most popular cryptocurrency, which rose to all-time highs since the beginning of 2021, before plummeting and losing a huge amount of its value. So, the lack of authorised information on these digital assets and the technological complexities associated with them makes it imperative to put regulations in place for safeguarding investors.

Allow select cryptocurrencies

Thousands of cryptocurrencies exist around the world. Most investors, however, are only familiar with a few of those, such as Bitcoin, Ether, Ripple, and Dogecoin among others. They hardly have any knowledge about the thousands of other virtual assets.
So, to protect customers, a regulatory authority clearing cryptocurrency is required, which can disclose all information about the performance of the digital assets, their risks, and potential.

Understanding risks associated with technology

Technology is advancing at a breakneck pace. This carries a significant danger, as such changes have the potential to render technology, including blockchain, outdated in the future. Given the rapid rate of technological change, information infrastructure and professional financial advisors skilled in cryptocurrency are required. That way, investors can understand the technological risks of cryptocurrencies and make informed decisions.

Online fraud and cyber security risks

Investing in cryptocurrencies comes with another risk — online fraud. Hacking is a major threat worldwide, and cyber-attacks have become common. One cyber-attack could result in losses for investors who have put their savings in cryptocurrencies. Through regulations, the authorities can implement measures to help cryptocurrency investors protect their assets. Also, investors can address concerns or reclaim their investments in case they lose them.

Money laundering

Any unregulated system has the ability to fund criminal acts. As a result, a client due diligence process akin to that of a bank is required. This can help in keeping track of investors' real identities and verifying their locations when they are buying or selling cryptocurrencies. Any infringement of such norms should be met with severe sanctions.

Current state of play in regulation

According to the World Economic Forum’s Global Future Council on Cryptocurrencies, there has been no internationally coordinated regulation of cryptocurrencies — though international bodies have been working on assessing risks and appropriate policy responses to the rise of cryptos.
While some jurisdictions, such as India, have amended existing laws, others, like Liechtenstein, have proposed bespoke models. Another approach, seemingly favoured by the European Union and UAE, proposes setting up entirely new regulators to deal with the industry in a comprehensive manner.

International Examples

U.S.A

Draft ‘Cryptocurrency Act of 2020’ defines cryptocurrencies into categories namely, crypto-commodities, crypto-securities and crypto- currencies. This is done in order to assign the appropriate federal crypto regulator as a soul government agency with authority to regulate:

Crypto-commodities (Agency-CTFC)

Crypto-securities (Agency-SEC)

Crypto-currencies (Agency-FinCEN)

Each of the above federal crypto regulators is required to make available to the public a current list of all federal licenses, certifications, or registrations required to create or trade in all digital assets. The Act also mandates to establish rules similar to financial institutions on the ability to trace cryptocurrency transactions.

Singapore

The Singapore Government has not defined virtual currency. In this regard a new piece of legislation the “Payment Service Act” has been enacted. The PSA when enforced will regulate the purchase and sales of virtual currencies. However, this Act has not defined either cryptocurrency or virtual currency. It has used the term “Digital Payment Token”

· These territorial differences, offer jurisdictional arbitrage opportunities, but they create uncertainties and increased compliance burden for businesses operating in the sector. This is exacerbated by the absence of common standards and terminologies.

Way Ahead

A blanket ban on cryptocurrencies isn’t desirable as they exist all over the world.
Regulating cryptocurrencies could be a healthy development for the industry, at least where everyday investors are concerned. Greater regulatory guidance, if well targeted, could help reduce speculation among crypto assets.

Budget 2022

The government imposed a 30% fixed tax rate on all income generated through crypto trading while also aiming to introduce the Digital Rupee in 2022–23.

It has also highlighted that losses on these crypto-assets cannot be offset to a later date. This means that any loss encountered during the trading of these assets will not be set off with other income sources and that it will be carried on to subsequent years.

In India, the Government can bring the crypto exchanges and other providers under the Prevention of Money Laundering Act, under the reporting entities in which case they will be treated same as banks, stock exchanges, intermediaries etc.
As they will follow all KYC measures and for this an amendment is not required and it can be done by a government notification which is the lowest hanging fruit
For a truly global coordinated approach, countries and international organizations must work together, leveraging best practices and learnings from each other.
Apart from risk assessments and establishing common standards, there is also a pressing need to leverage the technology itself to develop fit for purpose and inclusive solutions, through public-private collaboration.