As global attitudes toward cryptocurrencies shift, India faces a growing need to re-evaluate its Cryptocurrency regulatory framework.

• In 2024, incoming U.S. president Donald Trump pledged to appoint crypto-friendly regulators, vowing to position the U.S. as the “crypto capital of the planet.” 
• His evolving position reflects the growing influence and acceptance of digital assets on the global stage.
• As part of this push, he launched a memecoin named $Trump and signed an executive order to create a Strategic Bitcoin Reserve and a U.S. Digital Asset Stockpile. 
• Additionally, the White House hosted a crypto summit to explore future strategies and innovations in the digital asset space.

About Cryptocurrency

• Cryptocurrency is a digital medium of exchange that operates on a blockchain. 
  • Blockchain is a decentralized digital ledger that records transactions across a peer-to-peer network without a central authority. 
• It uses cryptographic techniques to verify transactions and algorithms to regulate supply.

Key characteristics of Cryptocurrencies

• Digital-Only: Cryptocurrencies exist only in electronic form and have no physical counterpart (like coins or bills).
• Decentralization: They operate on a decentralized network, meaning no single entity (like a bank) controls the currency.
• Cryptography: Transactions are secured using cryptographic techniques, ensuring authenticity and preventing fraud.
• Limited Supply: The supply of most cryptocurrencies is governed by a protocol (e.g., Bitcoin has a maximum supply of 21 million coins).

Potential Applications of Cryptocurrency

• Financial Services: Blockchain improves settlement speed, real-time transactions, and cost reduction. 
  • Example: JP Morgan’s JPM Coin enables instant settlement between institutional clients.
• Healthcare: Blockchain enhances data security, electronic medical records, and fraud prevention. 
  • Example: Andhra Pradesh secures patient data and land records using blockchain.
• Retail: Retailers leverage NFTs for customer engagement and exclusive digital experiences. 
  • Example: Adidas and Nike have launched NFTs and Metaverse stores.
• Marketing and Advertising: Blockchain enhances transparency in data sharing and prevents ad fraud. 
  • Example: IBM integrates blockchain into digital advertising to combat fraud.
• Real Estate: Smart contracts streamline property transactions, ensuring security and transparency. 
  • Example: A Delhi-based startup launched India’s first real estate tokenisation project in 2021.
• Lending: Blockchain enables faster and cost-effective lending by removing intermediaries. 
  • Example: Indian P2P platform LenDenClub uses blockchain for loan processing.
• Gambling and Gaming: Blockchain enhances fairness and anonymity in online gambling transactions. 
  • Example: Winz.io, an online gaming platform, uses blockchain for transparency.

Regulation of Cryptocurrency

• Regulations for crypto are the legal and procedural frameworks that governments enact to shape many different aspects of digital assets. 

Global Regulation

• Switzerland: Switzerland’s “Crypto Valley” is a global hub for blockchain startups. Switzerland ensures robust investor protection while fostering innovation, making it a model for balancing growth and security.
• United States:  The US has shifted from skepticism to fostering a stable environment for crypto businesses, with clearer regulations on stablecoins and institutional involvement.
• European Union: The EU’s Markets in Crypto-Assets (MiCA) regulation provides a unified framework for crypto assets across member states, ensuring consistency and clarity.
• El Salvador:  El Salvador became the first country to adopt Bitcoin as legal tender, aiming to drive financial inclusion and reduce remittance costs.
• Singapore: Singapore’s Payment Services Act provides a clear licensing framework for crypto businesses, ensuring compliance and consumer protection.

Legal Status of Cryptocurrencies in India

• India has not classified cryptocurrencies as illegal, but they are not recognised as legal tender.
• Trading and investing in cryptocurrencies is allowed, but they are not authorised for use as currency. 
  • This legal ambiguity creates challenges for investors, traders, and even enforcement agencies.
• Cryptocurrency Taxation in India: The government’s taxation framework includes a 30% tax on gains and a 1% TDS (Tax Deducted at Source) on cryptocurrencies. 

Why India Needs to Reevaluate Its Crypto Policy?

• Global Shift Toward Crypto-Friendly Policies: Countries like the U.S., U.K., and EU nations are adopting progressive regulations to embrace cryptocurrencies.
  • The U.S. under President Trump, aims to become the “crypto capital of the planet” by appointing crypto-friendly regulators and creating a Strategic Bitcoin Reserve. 
• Growing Crypto Adoption in India: Despite regulatory challenges, India has emerged as one of the largest crypto markets globally, with millions of Indians investing in digital assets. 
  • According to a  report by Chainalysis, India ranked second in the Global Crypto Adoption Index, with over 10 crore crypto users as of 2023.
• Economic and Technological Benefits: Cryptocurrencies and blockchain technology can drive financial inclusion, especially in rural and underserved areas. 
  • Stellar and Ripple are blockchain platforms facilitating cross-border remittances at lower costs, which is crucial for India, the world’s largest recipient of remittances.
• Addressing Risks and Challenges: Cryptocurrencies face risks like fraud, money laundering, and volatility. A revised policy can mitigate these through KYC norms, AML measures, and investor protection mechanisms.
  • The collapse of FTX in 2022 exposed vulnerabilities in investor protection, with users losing billions.  
• Aligning with Global Standards: Cryptocurrencies are borderless, and India’s unilateral restrictions may hinder its participation in the global digital economy. 
  • Aligning with international standards can enhance India’s competitiveness and ensure it doesn’t miss out on the digital asset revolution.

Cryptocurrency Limitations and Concerns

• High Volatility: The absence of a central regulatory body makes cryptocurrencies highly susceptible to price fluctuations.
  • The Reserve Bank of India (RBI) has warned against cryptocurrency transactions, citing risks to financial stability.
• Financial Instability: The unregulated nature of cryptocurrencies can weaken monetary policy effectiveness and increase fiscal risks.
  • The International Monetary Fund (IMF) cautioned El Salvador about financial instability after it adopted Bitcoin as legal tender.
• Cyber Threats: Cryptocurrency platforms are vulnerable to hacking, system manipulation, and fraudulent activities.
  • Private keys stored by wallet service providers are often targeted by malware attacks and hacking incidents.
• Criminal Activities: The anonymous nature of crypto transactions makes them attractive for terror financing and money laundering.
  • A global framework has been proposed to license crypto service providers and enforce anti-money laundering (AML) and counter-terrorist financing (CFT) standards.
• Energy Security and Climate Change: Cryptocurrency mining requires massive electricity consumption, leading to increased greenhouse gas emissions.
  • In 2018, Bitcoin mining consumed as much electricity as Switzerland, raising concerns about meeting global net-zero targets.

Way Forward for India’s Cryptocurrency Policy

• Establish a Clear Regulatory Framework: Formulate a comprehensive crypto regulation bill that differentiates between various types of digital assets (cryptocurrencies, stablecoins, NFTs, DeFi tokens).
• Investor Protection and Consumer Safeguards: Set up investor protection mechanisms such as grievance redressal systems, insurance for crypto holdings, and mandatory risk disclosures by exchanges.
  • Develop an independent regulatory body like SEBI and RBI to oversee crypto exchanges and trading platforms, ensuring compliance with financial laws.
• Integration of Crypto with the Digital Rupee (CBDC): Ensure interoperability between cryptocurrencies and India’s Central Bank Digital Currency (CBDC), the Digital Rupee.
  • Explore a hybrid system where CBDCs can be used for state-backed financial transactions, while regulated cryptocurrencies function within the private sector.
• Learning from Global Best Practices: Study Switzerland’s regulatory approach, where crypto is legally recognized with investor protections while fostering blockchain innovation.
• Encourage Blockchain and Web3 Innovation: Establish crypto-friendly special economic zones (SEZs) where blockchain startups can operate under relaxed regulations.
• Foster International Collaboration: Engage with global regulatory bodies such as the Financial Stability Board (FSB) and the International Monetary Fund (IMF) to create aligned policies.

Conclusion

The cryptocurrency revolution is reshaping the global financial landscape, and India has the potential to be at the forefront of this transformation. By embracing innovation, ensuring investor protection, and fostering a supportive regulatory environment, India can unlock the immense potential of cryptocurrencies while safeguarding its financial stability. 

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