The Indian government is seemingly at an impasse over which governmental regulatory body should be held responsible for cryptocurrencies. We take a look an unexplored option that seems to be the top choice of India’s top Bitcoin startups: self-regulation.
Regulatory Turf War
The government’s bid to regulate Bitcoin has been stalled due to a difference of opinion between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) about the nature of categorization of the cryptocurrency. A stakeholder meeting was organized by the country’s finance ministry last week to discuss the regulatory framework of the virtual currency.
While the RBI sees Bitcoins as a security and has proposed that it should be regulated by SEBI as commodity derivative in the same vein as Gold and Silver, SEBI disagrees and has staunchly fought against such an interpretation. SEBI argues that in the absence of proper legal terminology and other legal gray areas surrounding Bitcoin, the cryptocurrency cannot be considered a commodity.
The mechanism for regulation needs to be comprehensive, technologically savvy, and foolproof, as even the slightest delay in keeping abreast with the latest developments in the field would render the regulations useless.
— Business Standard (@bsindia) July 22, 2017
The Demand for Bitcoin in India
Bitcoin has been gaining traction of late in India and reports indicate that over a million users of the cryptocurrency in the country make it the 4th highest Bitcoin trading market globally. The nation’s Bitcoin startup scene is booming, as is evidenced by the rise in its trade. Zebpay, the biggest exchange in India reported monthly trades worth around ₹200 crore ($31 million) since the beginning of the new year which is almost a 2300% increase from its trade volumes last year. Unocoin, a successful start-up, now boasts over 1,50,000 customers.
With greater adoption of this financial technology, its demand has shot through the roof. In just seven years, the worth of 1 Bitcoin has risen from ₹5 to ₹1,75,000.
Unlike the west, India doesn’t yet offer ways to buy Bitcoin directly with cash, e-wallets, or through Bitcoin ATMs. The sellers on LocalBitcoins.com quote such exaggerated prices that it turns most people away towards the more reputable exchanges, which all follow stringent universal industry standard verification processes. The Know-Your-Customer (KYC) requirement ensures proper identification by recording your bank account details and PAN card information.
The Case for Self Regulation
Zebpay co-founder Sandeep Goenka believes that the creation of a self-regulatory body is not just the preference of the Indian Bitcoin Industry, but also represents the best solution to the problem of regulating virtual currencies. He argues that the industry will face constant evolution and change at least initially, making it virtually impossible for the government to keep up with the adjustments and developments. It, therefore, makes sense for a self-regulatory organization (SRO) to be in charge of overseeing the changes much like how certain associations regulate the operation of the country’s Mutual Fund, Internet, and Mobile sectors.
SEBI also started as a self-regulating organization. They themselves created the regulatory structure which after many years became an official regulatory body. That’s the beauty of an SRO, that while the industry is evolving, the government does not take the burden of the responsibility. Instead, the industry does.
The legacy model that is being used to decide how to regulate virtual currencies is not equipped to deal with these financial technologies and pose a major challenge as they can provide the functionality of both currencies and stocks (through ICOs).
Will self-regulation by Bitcoin players spur RBI to authorise use of virtual currencies? https://t.co/5AFmkcc4QF
— Sunny Ray (@SunnyStartups) April 13, 2017
The interdisciplinary committee tasked with examining the regulatory framework on virtual currencies was briefed about the concerns surrounding the misuse of Bitcoin. The implications of Bitcoins in an Indian context were pertinent to ‘regulation of foreign exchange, money laundering and terror financing, taxation of virtual currency, and consumer protection.’
While it is imperative for a fair amount of moderation and regulation to be exercised to allow for the smooth operation of cryptocurrencies as well as to assuage public fears about this new financial technology, any sort of heavy regulation and legislation will dampen the enthusiasm in virtual currencies. The government must not forget the bigger picture: experimenting with this technology can pave the way for a long overdue change in the legacy financial systems, and regulatory regime, both of which have proven to be unreliable and unjust.
Research has indicated that the Blockchain technology behind cryptocurrencies has the ability to increase productivity and innovation in various aspects of the government. Taxation or regulation in order to protect from its abuse is fair game, but it’s a thin line that needs to be tread cautiously.
It might be a good idea for the government to designate an SRO to regulate the unpredictable world of cryptocurrencies at least for the next couple of years. There already exists a self-regulatory board called the Digital Asset and Blockchain Foundation of India (DABFI) that comprises the country’s top cryptocurrency start-ups such as Zebpay, Unocoin, Coinsecure, and Searchtrade.
Do you think a government regulated body will be more knowledgeable and allow for a greater growth of cryptocurrencies as opposed to a self-regulatory body? What do you think are the benefits and drawbacks of both these regulators? Let us know in the comments below.
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