Opinion | What should cryptocurrency industry leaders do to convince policymakers in India?

By Neelam Rani and Jatinder Handoo

The bedtime childhood stories sometimes teach life-long pertinent lessons which must be remembered no matter how old one grows. Most would recall the Aesop’s Fables’ classic “The Tortoise and the Hare”. Remember how the swift and smart hare in all his zeal and exuberance lost to the slow yet consistent tortoise. Moral of the story is perhaps what leaders of cryptocurrency in India need to anoint themselves with. It would need an evidence based sustained engagement over a period with Indian policymakers and perhaps no other time could be better than this one to implement the policy prescription when Indian crypto market is already perhaps at its lowest ebb after a decline in the market sentiment post 30% tax rate and 1% TDS announcement by the Indian government.

Don’t Score a Self-Goal:  Never Upset the Crown

Recently, at-least two interesting developments have taken place in India, which rather could be termed as the self-inflicted jibes.  The first one  was a  reflection of sheer  infancy in (mis)reading Indian public policy sentiment towards crypto and sensitivities associated with payments system environment in India, when a senior executive of a foreign crypto exchange at a glitzy crypto event in Bengaluru on April 07,2022  publicly  drew interlinkages between Reserve Bank of India (RBI) promoted National Payments Corporation of India Ltd (NPCI) payments system – Unified Payments Interface (UPI) for transfer of funds to  crypto exchanges  in India. Remotely would have he anticipated his blithely spoken words would be a public policy misadventure, which could further accentuate the pains of crypto-traders, the exchanges, and customers in India, making them a sort of banking untouchables (at-least in perception). 

Anticipating that many industry and policy analysts may (mis)interpret the statement from foreign crypto exchange executive as if RBI were paving payment rails for encouraging cryptocurrency transactions in India, promptly came a public statement from NPCI on the same day clarifying that they were not aware if UPI was being used for purchase of cryptocurrencies in India, after which many regulated banking & payments entities either stopped or distanced themselves from such transfers to crypto exchanges. When everyone in Indian policy echelons is aware that RBI is not in favour of private cryptocurrencies in India, such a reference was unwanted and poorly timed. 

The second jibe is a news regarding moving out of the business base by two founders of one of the largest Indian Crypto exchanges to Dubai. The founders reportedly have made the transition due to purported crypto unfriendly ecosystem in India. Such a brain drain is not a new phenomenon. In 2018 the exchanges like Vauld and Zebpay had shifted to Singapore.  Countries with favorable crypto currency regulations attract global talent and work from anywhere environment further facilitates such transitions. Indian crypto exchanges which are already registered in Singapore are COIN DCX and Coin Switch Kuber, others have either moved to USA, Cayman Islands, Malaysia, or Dubai.

Regtech and Virtual Digital Asset Special Economic Zones (SEZ) in India

Transactions carried out with cryptocurrencies are seen with an eye of suspicion by policy makers and economic offences cum law enforcement agencies not just in India but in many foreign countries. According to a report of the attorney general’s cyber digital task force of the United States department of justice, cryptocurrencies have been used by criminals to transact in illegal trade, fund terrorism and help rouge states to use cryptos for funding cyber-attacks.  Yet, in those countries, policy makers are trying to foster room for digital asset ecosystem through specialized regulations, which tells us something useful – Government across the world may not be against the underlying technology of blockchain or cryptocurrencies per se, but they are absolutely concerned about the anonymity and some possible anti-law use cases of crypto currencies. Having said it, around 35% mining of Bitcoins still takes place in the US (as on March 2022) and the Biden government in February 2022 passed an “Executive Order on Ensuring Responsible Development of Digital Assets” to facilitate crypto ecosystem in USA. Countries like United Arab Emirates, where Emirate of Dubai has done it through Dubai Virtual Assets Regulatory Authority – a specialised agency to regulate crypto and digital assets. Dubai World Trade Centre Authority (DWTCA) has also taken specific lead.

In the Indian context, the regulatory void continues, thus comes the role of trade associations and consumer organizations to have a sustained engagement with key policy makers and other civil society stakeholders to work out mutually acceptable solutions which could provide VDA market (NFTs, Metaverse, cryptocurrencies, DLTs etc.) a space to operate in India without being stifled. The onus of educating and facilitation lies on trade associations and associated business. The Indian Government must realize, in a digitally decentralized ecosystem with hyper connectivity, only unusual curbs like those in totalitarian states would make VDAs inaccessible to Indians. It is always favorable that Indian consumers choose to transect in India based exchanges under staggered KYC regime rather than transacting at exchanges with zero KYC and low or no controls. In a regulatory lull, many foreign investors are sitting on fence and watching regulatory air to clear in India.  

Movement from compliance to a voluntary market takes time.  As India seems to be the latter one, at least, what could be done in the meantime is the use of regtech regime, associated protocols, and global learnings to allow VDAs including crypto exchanges for trading in low-risk products. Just like Industrial Special Economic Zones (SEZ)  , Virtual Digital Asset -SEZ could be allowed in India and perhaps enterprise use cases or Business to Business (B2B) transactions may see light of the day , as an initial step.  If Indian Government fails to provide a flourishing environment to VDAs  and other chain technologies including cryptocurrencies , then taxing such assets is akin to tax slave trade of seventeenth  century.

Change in the Storyboard –  Favourable Policy For Faster Adoption.

Harbingers of crypto and virtual digital assets advocacy in India have a serious and a visionary  role to play to make VDAs a successful policy story India.   As of now the policy advocacy narrative  is  hovering largely around  crypto-exchanges and crypto-currencies as a medium of exchange or an asset  (trading).  The entire narrative language and engagement strategy would need to move around a wide ecosystem to create future  network-effects of the chain ecosystem  . Once a VDA and crypto-tipping point is attained  in India, networks will take care of currency use case itself, just as we have seen the case with electronic or retail mobile payments in India. While engaging with policymakers and users (enterprise and retail ) with a specific focus on crypto-currency , perhaps  would be a myopic and an irrational approach. 

The entire narrative and advocacy strategy rather must  be focussed on ecosystem level opportunities like programmable business models, smart contracts, DeFI, NFTs, Metaverse, Third generation Digital Ledger Technologies (DLTs) etc. 

The focus of the crypto-ecosystem itself is already moving from blockchain 1&2 to third generation blockchain, which means that inefficiencies of the past are taken care of by the system itself (including bitcoin, ether etc.). The narrative among crypto community members itself is shifting from energy intensive Proof of work  based protocol to green Proof of Stake based protocols to make transactions and system more green, transparent , auditable and agile. Many firms across the world are entering into metaverse ecosystem to offer unique user experiences. Artists, investors and lovers of art  conspicuously have been shifting to NFT for last few years. It is tokenisation  where everyone is bullish on. 

Many sectoral experts in a recently held  3^rd round table discussion on Blockchain organised by the European Business University(EBU) Luxembourg agreed that eventually the multiple block-chains will see interoperability and P2P use case of cryptocurrencies will  internalise  automatically concerns like weeding out of a few black sheep to forbid illegal transactions on DLTs.

Finally,  a narrative modelling driven by the Big Hairy Audacious Goal (BHAG) for VDA industry in India has to be  grand, visionary and optimistic , which will unlock  potential through favourable public policy in India rather than statements and actions with unintended consequences. Valuing nuances and understanding the thought process is the key.  Movement from compliance to a favourable market in India may take some time, but once it happens, the transformation will be huge for business and citizens. 

(Neelam Rani is Associate Professor and Jatinder Handoo is scholar at IIM Shillong. The views expressed above are those of the authors and not necessarily of financialexpress.com).