Financial market regulation involves state control, which conflicts with the decentralized nature of blockchain technology (DLT). The challenge lies in finding a balance between transaction freedom with state oversight, as currency issuance is a sovereign function.
Current uses of blockchain technology in the cryptocurrency market
- Cryptocurrency payments between users, which can be conducted through wallets, cryptocurrency exchanges, and brokers, including operations with stablecoins.
- Trading and investing on centralised cryptocurrency exchanges.
- Fundraising for projects through Initial Coin Offerings (ICO) and Initial DEX Offerings (IDO).
- Trading derivative financial instruments based on cryptocurrency assets.
- Operations with Non-Fungible Tokens (NFTs) and the confirmation of ownership of unique digital objects, such as images, videos, audio files, or gaming items.
- The use of crypto applications and platforms based on decentralised finance (DeFi).
In March 2020, the Supreme Court of India lifted the ban on cryptocurrencies. Following this, the government introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. This bill, currently under revision, aims to recognise cryptocurrencies as regulated assets under the Securities Exchange Board of India (SEBI).
The current regulatory status remains undefined. On behalf of the Ministry of Finance, the Minister of State for Finance, Shri Pankaj Chaudhary, stated: ‘Crypto assets are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation on the subject can be effective only with significant international collaboration on the evaluation of risks and benefits, and the development of common taxonomy and standards.’
The primary objectives of establishing a favourable legal regime are, on one hand, to ensure the protection of the rights and legitimate interests of investors who use DLT technology for financial transactions and, on the other hand, to safeguard the state against 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:
- Define the legal status of cryptocurrencies, which may include categorisation as securities, commodities, and more.
- Establish a licensing mechanism for cryptocurrency exchanges and payment systems that would provide robust protection for investors against fraud.
- Implement transparent procedures for customer identification and compliance with anti-money laundering regulations.
- Develop a favourable tax regime that is competitive with other jurisdictions, making India attractive for launching startups and crypto projects.
According to Kar Yong Ang, an Octa broker financial market analyst, ‘The most important issue that the regulator needs to consider is the regime for digital assets that include cryptocurrencies. If the tax rates are high (more than 5%), most of the persons performing transactions with cryptocurrencies will continue to remain in the grey zone, which on the one hand will reduce tax revenues, and on the other hand, will increase the risk of scam and fraud for cryptocurrency users.’
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