Reviews | What should cryptocurrency industry leaders do to convince policy makers in India?
By Neelam Rani and Jatinder Handoo
Childhood bedtime stories sometimes teach lifelong relevant lessons to be remembered regardless of age. Most would remember the classic Aesop’s Fables “The Tortoise and the Hare”. Remember how the quick and clever hare in all its zeal and exuberance lost out to the slow but steady tortoise. The moral of the story is perhaps what India’s cryptocurrency leaders need to anoint themselves. It would take sustained evidence-based engagement over a period with Indian policymakers and perhaps no other time could be better than this to implement the policy prescription when the Indian crypto market is already possibly at its lowest level after a drop in market sentiment after 30% tax rate and 1% TDS announced by the Indian government.
Do not mark a personal goal: never disturb the crown
Recently, at least two interesting developments have taken place in India, which could rather be called self-inflicted mockery. The first was a reflection of pure childhood (mis)reading Indian public policy sentiment towards crypto and sensitivities associated with India’s payment system environment, when a senior executive at ‘a foreign crypto exchange at a glitzy crypto event in Bengaluru on April 07, 2022 publicly linked the Reserve Bank of India (RBI) to the payment system promoted by National Payments Corporation of India Ltd (NPCI) – Unified Payments Interface (UPI) for transferring funds to crypto exchanges in India. From afar, he would have anticipated that his gleefully spoken words would be a public policy mishap, which could further deepen the pains of crypto traders, exchanges and customers in India, making them something of a banking untouchable (at least). less in perception).
Anticipating that many industry and policy analysts might (mis)interpret the foreign crypto exchange executive’s statement as RBI opening up payment rails to encourage cryptocurrency transactions in India, a statement NPCI’s public quickly came out the same day clarifying that they were unaware if UPI was being used for buying cryptocurrencies in India, after which many regulated banking and payment entities shut down or walked away of these transfers to crypto exchanges. When everyone in the Indian political echelons is aware that RBI is not in favor of private cryptocurrencies in India, such a reference was undesirable and poorly timed.
The second jibe is news about the departure from the trading base of two founders of one of India’s largest crypto exchanges in Dubai. The founders are said to have made the transition due to an alleged crypto-unfriendly ecosystem in India. Such a brain drain is not a new phenomenon. By 2018, exchanges like Vauld and Zebpay had moved to Singapore. Countries with favorable cryptocurrency regulations attract global talent, and working from any environment further facilitates these transitions. Indian crypto exchanges already registered in Singapore are COIN DCX and Coin Switch Kuber, others have moved to the United States, Cayman Islands, Malaysia or Dubai.
Regtech Special Economic Zones (SEZs) and Virtual Digital Assets in India
Transactions made with cryptocurrencies are viewed with suspicion by policy makers and economic offenses by law enforcement not only in India but in many foreign countries. Cryptocurrencies have been used by criminals to conduct illegal business transactions, fund terrorism, and help red states use cryptos, according to a report by the United States Department of Justice Attorney General’s Cyber-Digital Task Force. to finance cyberattacks. Yet in these countries, policymakers are trying to accommodate the digital asset ecosystem through specialized regulations, which tells us something useful – Governments around the world may not be against the underlying blockchain technology or cryptocurrencies per se, but they are absolutely concerned about the anonymity and some possible anti-law use cases of cryptocurrencies. currencies. That said, approximately 35% of Bitcoin mining still takes place in the United States (as of March 2022) and the Biden government passed an “Executive Order on Ensuring Responsible Development of Digital Assets” in February 2022. to facilitate the crypto ecosystem in the United States. Countries like the United Arab Emirates, where the emirate of Dubai has done so through the Dubai Virtual Assets Regulatory Authority – an agency specializing in the regulation of crypto and digital assets. The Dubai World Trade Center Authority (DWTCA) has also taken specific initiatives.
In the Indian context, the regulatory vacuum persists, hence the role of business associations and consumer organizations to have sustained engagement with key policy makers and other civil society actors to develop mutually acceptable solutions that could provide the VDA market (NFT, Metaverse, cryptocurrencies, DLT, etc.) a space to operate in India without being choked. Responsibility for education and facilitation rests with trade associations and associated companies. The Indian government must realize that in a digitally decentralized ecosystem with hyper connectivity, only unusual restraints like those of totalitarian states would make VDAs inaccessible to Indians. It is still favorable for Indian consumers to choose to transect in India-based exchanges under a tiered KYC regime rather than transacting in exchanges with zero KYC and little or no checks. In a regulatory lull, many foreign investors are sitting on a fence watching the regulatory air clear in India.
Moving from compliance to a voluntary market takes time. As India seems to be last, at least what could be done in the interim is the use of the regtech regime, associated protocols and global learnings to enable VDAs including crypto exchanges to trade low risk products. Just like Industrial Special Economic Zones (SEZ), Virtual Digital Assets -SEZ could be allowed in India and perhaps enterprise use cases or business-to-business (B2B) transactions could emerge, in a first weather. If the Indian government fails to provide a thriving environment for VDAs and other on-chain technologies, including cryptocurrencies, then taxing these assets is akin to the slave trade tax of the 17th century.
Change in storyboard – Favorable policy for faster adoption.
Frontrunners in India’s crypto and virtual digital asset advocacy have a serious and visionary role to play in making VDAs a successful political story in India. Currently, the policy advocacy discourse largely revolves around crypto exchanges and cryptocurrencies as a medium of exchange or asset (trading). The entire narrative language and engagement strategy should move into a broad ecosystem to create the future network effects of the channel ecosystem. Once a VDA and crypto tipping point is reached in India, the networks will take care of the currency use case themselves, much like we have seen with electronic or retail mobile payments in India. While engaging with policymakers and users (corporate and retail) with a particular focus on cryptocurrency, this might be a myopic and irrational approach.
Instead, the entire storytelling and advocacy strategy should focus on ecosystem-level opportunities such as programmable business models, smart contracts, DeFI, NFTs, metaverse, digital ledger technologies of third generation (DLT), etc.
The focus of the crypto-ecosystem itself is already shifting from blockchain 1&2 to 3rd generation blockchain, which means past inefficiencies are being taken care of by the system itself (including bitcoin, l ether, etc.). The narrative among members of the crypto community itself is shifting from energy-intensive proof-of-work based protocol to green proof-of-stake based protocols to make transactions and system greener, transparent , auditable and agile. Many companies around the world are entering the metaverse ecosystem to deliver unique user experiences. Artists, investors and art lovers have visibly turned to NFT in recent years. This is the tokenization where everyone is optimistic.
Many industry experts at a recent 3rd Roundtable on Blockchain organized by the European Business University (EBU) Luxembourg agreed that eventually multiple blockchains will see interoperability and the P2P use case of cryptocurrencies will automatically internalize concerns such as elimination of some black sheep to prohibit illegal transactions on DLTs.
Finally, a narrative modeling guided by the Big Hairy Audacious Goal (BHAG) for the VDA industry in India must be grand, visionary and optimistic, which will unlock the potential through supportive public policy in India rather than statements and actions with unintended consequences. Valuing the nuances and understanding the thought process is key. The transition from compliance to a favorable market in India may take some time, but once it happens, the transformation will be huge for businesses and citizens.
(Neelam Rani is an associate professor and Jatinder Handoo is a researcher at IIM Shillong. The opinions expressed above are those of the authors and not necessarily of financialexpress.com).