Cryptocurrencies: Are Wary Regulators Finally Taking Baby Steps To Protect Investors?

Notwithstanding this, daring young Indians have been rapidly moving away from traditional modes of investment. Amid shifting geopolitical and geo-economic patterns, they no longer want safe assets for investments. The craze to invest in cryptocurrencies or virtual digital assets (VDAs), such as bitcoin and Ethereum, among others, therefore, has caught on with the tech-savvy Indians, despite repeated warnings by the government and the Reserve Bank of India (RBI) on this particular asset class.

India recently launched the National Blockchain Framework to strengthen "transparency, immutability, decentralisation, and trust", even though officials in the Ministry of Electronics and Information Technology (MeitY) noted that the blockchain framework will not be extended for providing protection to crypto assets. The framework, as of now is only to maintain and strenthen data recording.   

Blockchain Framework

Sources said that the blockchain framework may be extended to providing support for VDA investors in the near future.    

"Emerging from its early association with cryptocurrencies, blockchain technology has evolved into one of the most transformative digital innovations of the 21st century," a government statement said. It added that, unlike technologies such as Artificial Intelligence (AI), which derive their strength from computational power, blockchain’s value lies in its ability to establish verifiable trust without intermediaries.  

So far, the government’s policy approach in dealing with cryptocurrencies has remained fragmented, though Union Finance Minister Nirmala Sitharaman, in 2023, pitched for a common framework among G20 countries on dealing with crypto assets.

Though the Finance Ministry and the RBI have held several discussions on this issue, there seems to be no consensus of opinion.

The regulators are yet to come on the same page to accept this as an investment mode; until that happens, there will be ambiguity and a loss to the exchequer, a government official said.

Blockchain technology is the underlying technology behind cryptocurrencies.

Trading and investing in cryptocurrencies are not illegal. But the regulators have not framed guidelines that provide protection and cushion to crypto investors.

India's Youth Goes Gaga Over Crypto

Multiple reports reveal that India tops the list globally in crypto adoption. The US comes in a close second.

“We have not been encouraging cryptocurrencies," Commerce and Industry Minister Piyush Goyal recently said at an event in Qatar.

Recently, World Economic Forum (WEF) President Borge Brende, during his visit to Brazil, said that a crypto bubble is in the making.

Closer home, just last year, India’s crypto exchange WazirX was hacked, leading to a reported loss of more than US$235 million. WazirX is not alone. Frauds have become a regular feature in the crypto space. 

Though there is no official estimate of the number of crypto exchanges all domestic ones have to register with the Financial Intelligence Unit (FIU). Several of them, such as CoinDCX and Coinswitch, besides WazirX, are a few prominent ones.

"Unlike gold or fixed deposits, crypto assets have no backing, and the whole system is working on a belief system that Bitcoin or Ethereum has some kind of value. Imagine if this belief system goes? You will be left with a digital file that is of no use to anyone," says Sumit Nagpal, Advocate, Delhi High Court.    

Investments in shares are also driven by market sentiments, but investor protection has been at the core, with stringent and well-crafted regulations, and a monitoring system.     

Efforts To Discourage Investors From Putting Money In Crypto

India levies a hefty 30 per cent tax on the earnings made from this “asset” class.

Besides, it also charges a one per cent additional tax deducted at source (TDS).

And yet, the race to acquire crypto is getting stronger by the day.

The reason is simple: Not just handsome returns – the returns are significantly higher than other asset classes.

According to data portal Statista, the number of Indians dealing in cryptocurrencies is projected to grow to 12.3 crore users by 2026. Compare this with the total number of demat account holders in India—the number stands at around 20 crore. Despite efforts to discourage people from investing in these digital currencies, the number is rapidly increasing.

However, there are no standard guidelines on licensing norms for the blockchain providers, which makes it riskier for investors. An inadequate regulatory framework makes it even worse. Though there is some basic sketchy framework that refers to limited loss set-off, mandatory exchange reporting, and goods and services tax on trading fees, it lacks a solid guideline.

Nagpal further said that the situation points to the need for the government to bring in stringent regulations on the usage of cryptocurrencies, and it should be mandated to report trans-border transactions. 

“There is a surge in the number of people in India going in for VDAs as they consider these as alternative assets to invest in, many for the long term. This is a sentiment that drives investors. BWA has guidelines for consumer protection, token listing and fair trade amongst others, and we urge the government to support a regulatory regime for minimising risks in the sector,” Dilip Chenoy, Chairperson, Bharat Web3 Association, and former Secretary General, FICCI, pointed out. An industry body, BWA provides the necessary infrastructure support for VDA platforms and the Web3 ecosystem.

Take the example of Bitcoin, the most popular form of crypto, which was born only in 2009. Globally, there are 21 million bitcoins. The increase in demand amid stagnant supply has led to soaring returns.

Like most other asset classes, it is the sentiment that determines the price of a Bitcoin. “When the market shifts to its “greed" phase, Bitcoin soars amid the utopian promises and speculators dismiss the risks of an asset that generates no cash flow,” Bankrate.com notes.

India’s Stringent Regulatory Approach

Chintan Research Foundation's study revealed that even as cryptocurrency is making its way into mainstream finance, India has remained wary of it, and the framework related to it “is among the most punitive.”

The surge in cryptocurrency investments underscores “the need for robust, transparent, and regularly updated frameworks to enable harmonisation and ensure effective compliance,” the study said.

India’s first cryptocurrency exchange, Unocoin, was launched in 2013.     

Another report – Unlocking India’s Trillion Dollar Web3 Potential: The Time For Regulations Is Now – prepared by consultancy firm Primus Partners, noted that with crypto takers increasing in India, it was time to put in place effective regulatory guidelines.

“In the absence of clear regulations, we risk losing not only our competitive edge but also a significant portion of the incremental economic growth projected over the next decade,” Shravan Shetty, Managing Director, Primus Partners, wrote in a note.