Reviews | What should leaders of the cryptocurrency industry 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 people would remember Aesop’s classic fables “The Turtle and the Hare”. Remember how the fast and clever hare in all his zeal and abundance lost to the slow but steady turtle. The moral of the story is perhaps what India’s leaders of cryptocurrency need to anoint themselves. It would require sustained evidence-based commitment over a period of time with Indian policy makers, and perhaps no other time could be better than this to implement the policy regulation when the Indian crypto market is already possibly at its lowest level following a drop in market sentiment at 30% tax rate and 1% TDS announced by the Government of India.

Do not mark a personal goal: Never disturb the crown

Recently, there have been at least two interesting developments in India that one might rather call self-inflicted mockery. The first was a reflection of pure childhood (mis) reading of Indian public policy mood towards crypto and sensitivities associated with the payment system environment in India, when a senior employee at a foreign crypto exchange at a glittering crypto event in Bengaluru on April 7, 2022 publicly linked 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 a long distance, he would have foreseen that his cheerfully spoken words would be a mishap in public policy, which could further aggravate the pains of crypto traders, stock exchanges and customers in India, making them something of a bank that is immovable ( in any case). less in perception. ).

In anticipation that many industry and policy analysts might (mis) interpret the foreign cryptocurrency exchange director’s statement as RBI opening payment rails to encourage cryptocurrency transactions in India, a statement came out by the NPCI public quickly the same day, clarifying, that they were not aware of whether UPI was being used to buy cryptocurrencies in India, after which many regulated banking and payment entities shut down or walked away from these transfers to crypto exchanges. When everyone in the Indian political strata is aware that RBI is not in favor of private cryptocurrencies in India, such a reference was undesirable and poorly timed.

The second gib is news of the departure of the trading base for 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. In 2018, stock exchanges such as Vauld and Zebpay moved to Singapore. Countries with favorable cryptocurrency rules 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 Cubes, others have moved to the US, Cayman Islands, Malaysia or Dubai.

Regtech Special Economic Zones (SEZs) and Virtual Digital Assets in India

Transactions conducted with cryptocurrencies are considered with suspicion by policy makers and economic violations of law enforcement, not only in India but in many foreign countries. Cryptocurrencies have been used by criminals to carry out illegal business transactions, finance terrorism and help red states use crypto, according to a report by the US Department of Justice Cyber-Digital Task Force to fund cyber attacks. But in these countries, policy makers are trying to address the digital asset ecosystem through specialized regulations that tell 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 instances of anti-legislation of cryptocurrencies. That said, about 35% of Bitcoin mining is still going on in the United States (as of March 2022), and the Biden government passed a “Decree on the Responsible Development of Digital Assets” in February 2022. to ease the crypto ecosystem in the United States . Countries such as 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 continues and therefore the role of business associations and consumer organizations is in having sustained engagement with key policy makers and other civil society actors to develop mutually acceptable solutions that could deliver VDA market (NFT, Metaverse, cryptocurrencies, DLT etc. .) a space to operate in India without being suffocated. The responsibility for training and facilitation rests with industry associations and associated companies. The Indian government must realize that in a digitally decentralized ecosystem with hyperlink, only unusual restrictions like those in totalitarian states will make VDAs inaccessible to Indians. It is still beneficial for Indian consumers to choose to trade in India-based exchanges under a tiered KYC regime instead of trading in exchanges with zero KYC and few or no checks. During a regulatory break, many foreign investors sit on a fence and see the regulatory air clear in India.

Moving from compliance to a voluntary market takes time. Since India seems to be the last, at least what could be done in the meantime is the use of the regtech regime, associated protocols and global experience to enable VDAs, including crypto exchanges, to trade low-risk products. Like Industrial Special Economic Zones (SEZ), Virtual Digital Assets -SEZ could be allowed in India, and perhaps business use 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 taxation of these assets is akin to the 17th century slave trade tax.

Change in storyboard – favorable policy for faster implementation.

Front-runners in India’s advocacy business for crypto- and virtual digital assets have a serious and visionary role to play in making VDAs a successful political story in India. Currently, the political advocacy discourse largely revolves around crypto exchanges and cryptocurrencies as an exchange or asset (trade). The whole narrative language and engagement strategy should move into a broad ecosystem to create the future networking effects of the channel ecosystem. Once a VDA and cryptocurrency tipping point has been reached in India, the networks themselves will take care of the currency use case, just as we have seen with electronic or retail mobile payments in India. While engaging with policy makers and users (businesses and retailers) with a particular focus on cryptocurrency, this can be a short-sighted and irrational approach.

Instead, the entire storytelling and advocacy strategy should focus on ecosystem-level opportunities such as programmable business models, smart contracts, DeFIs, NFTs, metaverse, third-generation digital ledger (DLT) technologies, and so on.

The focus of the crypto ecosystem itself is already shifting from blockchain 1 & 2 to 3rd generation blockchain, which means that 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 shifts 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 approached NFT in recent years. This is the tokenization where everyone is optimistic.

Many industry experts at a recent 3rd The Roundtable on Blockchain organized by the European Business University (EBU) Luxembourg agreed that more blockchains will eventually see interoperability, and the P2P use case of cryptocurrencies will automatically internalize concerns such as the elimination of some black sheep to ban illegal transactions on DLTs.

Finally, a narrative modeling guided by Big Hairy Audacious Goal (BHAG) for the VDA industry in India must be magnificent, visionary and optimistic, which will unleash the potential through supportive public policy in India rather than statements and actions with unintended consequences. Appreciating 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 that 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 above are those of the authors and not necessarily

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