New Delhi: With the crypto industry currently driving substantial technological innovation and amidst the ongoing debate over it the concerned industry and stakeholders have sought a demarcation between crypto/digital tokens and Bitcoin.
A Confederation of Indian Industry paper argues that crypto/digital tokens are not all about Bitcoin. In fact, it is perhaps inappropriate to even address most crypto/digital tokens as ‘crypto currencies, and the expression ‘crypto/digital tokens’ seems more appropriate.
The CII report points out that Blockchain innovations around the Ethereum main-net, side chains and Layer 2 have the potential to transform the future of payments, remittances, finance, investments, and beyond, with significant socio-economic benefits. The diverse socio-economic benefits that could potentially flow from the adoption of blockchain technology have been acknowledged by the Ministry of Electronics and Information Technology in its draft of the National Strategy on Blockchain published in January 2021. Moreover, Blockchain innovations promise an alternative decentralized paradigm to the privacy-compromising ad revenue seeking centralised social media platforms.
The decentralized nature of blockchain across an inter-connected P2P network (as opposed to requiring a centralised actor or intermediary) also makes it difficult to manipulate, hack or tamper with the records, mitigating the risk of fraud. Further, every financial interaction on the rails of the blockchain network on which crypto/digital tokens run, leave a digital footprint and auditable trail.
According to the paper, a key issue arising in this context is how to ensure tax compliance by participants investing or dealing in crypto/ digital tokens and specific to India, what mechanism if any, should be evolved to safeguard compliance with foreign exchange laws given the global financial asset character of crypto/digital tokens? The report suggests that a well-designed Central Bank Digital Currency (“CBDC”) from RBI can take the financial inclusion agenda of the government to a whole new level – touching remotest regions of India hard to service for commercial banks – CBDC enabled P2P digital payments outside the banking system. A balanced and thoughtful regulatory approach to crypto/digital tokens needs to be evolved in India. It is felt that the regulatory toolbox should accept, not reject and outlaw, the new world of crypto/digital tokens founded on decentralized, digitally verifiable financial interactions enabled by blockchain technology.
The paper recommends treating crypto/digital tokens as ‘securities’ of a special class3, to which the provisions of existing securities regulations will not apply and instead, a new set of regulations appropriate to the context of crypto/digital currencies and their jurisdiction-less, decentralized character, should be evolved and applied. This would mean regulatory focus principally on dealings and custody, rather than on issuance (except where issuance entails an initial coin offering (“ICO”) to the public by an issuer established in India). Separately, given the nascent stage of this new paradigm, it may be appropriate for the government to consider setting up a standing Advisory Council comprising representatives from regulators, policymakers, participants and stakeholders to act as a sounding board to the government as well as to advice the government on emerging issues and the way forward.