Regulation
Prospects for Cryptocurrency Development in South Asia
The scalability of fintech depends on the adaptability of the legal system. India, with 93 million cryptocurrency holders, ranks first globally. However, India is not among the top 20 countries for favorable cryptocurrency regulations. Establishing a favorable legal regime is crucial for the development of the Indian market, especially with the middle class expected to reach 90% of the population by 2039.
Market regulation implies state control, which conflicts with the decentralized nature of blockchain technology (DLT). The challenge is to balance freedom of transaction and state oversight, since currency issuance is a sovereign function.
Current uses of blockchain technology in the cryptocurrency market
1. Cryptocurrency payments between users, which can be made through e-wallets, cryptocurrency exchanges and brokers, including transactions with stablecoins.
2. Trading on centralized cryptocurrency exchanges.
3. Fundraising for projects through Initial Coin Offering (ICO) and Initial DEX Offering (IDO).
4. Trading in derivative financial instruments based on cryptocurrency assets.
5. Transactions with non-fungible tokens (NFTs) and confirmation of ownership of unique digital objects, such as images, videos, audio files or game items.
6. Using DeFi-based crypto applications and platforms.
[Cryptocurrency Regulatory Framework]
In March 2020, the Supreme Court of India lifted the ban on cryptocurrencies. The government subsequently introduced the Cryptocurrencies and Regulation of Official Digital Currencies Bill, 2021. This bill, currently under review, aims to recognize cryptocurrencies as regulated assets by the Securities Exchange Board of India (SEBI).
The current regulatory status remains undefined. On behalf of the Ministry of Finance, Minister of State for Finance, Shri Pankaj Chaudhary, said, “Cryptocurrencies are borderless by definition and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation on the subject can only be effective with meaningful international collaboration on risk-benefit assessment and development of common taxonomy and standards.”
The primary objectives of establishing a favorable legal regime are, on the one hand, to ensure the protection of the rights and legitimate interests of investors using DLT technology for transactions, and, on the other hand, to safeguard the state from 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 from fraud.
3. Implement transparent procedures for customer identification and compliance with anti-money laundering regulations.
4. Develop a favorable and competitive tax regime compared to other jurisdictions, making India attractive for launching crypto startups and projects.
According to Kar Yong Ang, financial market analyst at Octa Broker, “The most important issue that the regulator needs to consider is the regime of digital assets that includes cryptocurrencies. Suppose the tax rates are high (over 5%). In that case, most people who transact with cryptocurrencies will still remain in the gray area, which will, on the one hand, reduce tax revenues and, on the other hand, increase the risk of scams and fraud for cryptocurrency users.”