Regulation, in general, refers to a set of rules or laws that govern how something should be executed. While it might sound exactly opposite to the 'decentralized' nature of crypto, it is important to have regulation as a basic set of guidelines in crypto that tells what's ethical behavior and what's not, because not only does that contribute to the overall adoption, but also makes sure that there is a fair market for everyone participating. It plays a major role in establishing trust especially in the early stages. That’s an overview on why we need regulation in crypto in a few words; let’s take a deeper look.
Regulation is necessary for any asset that is not a legal tender in a nation; including stocks and gold. For example, the Prime Minister of India recently enforced a mandatory hallmarking for gold as a part of gold regulation across the country. Hallmarking provides guarantee of purity of the valuable metal—something that’s needed in case of gold, and also ensures that customers get a fair value for their new jewellery purchases as well as their exchanged or collateralised gold. But you might be thinking that it is something that would not be needed in case of cryptocurrencies, as gold is very different. While that does make sense, regulation in cryptocurrencies is a bit different as well. Let’s talk about the reasons why we need regulation for cryptocurrencies.
Most of the cryptocurrencies bring a unique set of risks, which is normal since most of them are not backed by a tangible asset or securities, which means that they don’t have a clearly defined intrinsic value. So the prices are driven solely by supply and demand, which in-turn introduces the risk of market manipulation (ref.). Regulation helps minimize that in order to protect the investors from extreme market volatility.
According to CoinMarketCap, there are over 17,000 cryptocurrencies in the market as of February 2022. In case of coins and tokens that are speculative or not well established, there’s also a risk of fraud by the developers and stakeholders, since all the funds are stored virtually. To overcome this, a regulatory bill can ensure that the market offers only select assets that have solid fundamentals and a proven track record of standing strong through the test of time with the technology they offer.
Due to the decentralized nature of cryptocurrencies, there’s a concern of money laundering and funding for illegal activities. This in-turn can possess a major threat as we don’t know if the surplus is flowing towards some illicit authority, scammers or terrorist groups, or getting converted from black to white money. Regulation helps in making sure that each transaction happens to-and-from an authorised party that holds the right to trade and invest within or outside a country. A simple solution such as a mandatory Know Your Customer (KYC) can keep a record of verifying the identity and rights of a trader or investor.
Not only these, but all such concerns altogether make it necessary to have certain rules and regulations for the crypto ecosystem to thrive in an economy.
Compliance, in general, refers to cooperating with and conforming to a framework in the form of rules and regulations defined by the governing authorities. While this might sound like ‘controlling’ how cryptocurrencies are driven in a market, compliance is important to ensure that we’re doing everything legally and ethically while being in the crypto market. It’s like law and order for crypto.
But why do we need compliance?
As of yet, crypto has a certain identity crisis that holds back the authorities from proceeding with a number of laws. Even though the Finance Minister of India considers crypto as an asset class, there’s no firm classification whether to consider it as a currency, commodity or an asset, which is a major part within the regulatory framework. Classifying crypto as a currency might be a threat to the national currency for any country. While classifying crypto into asset-class would be the most feasible way to regulate, it would be the best to wait for the government’s final take on this.
There’s also ambiguity over taxation of cryptocurrencies because it would be interdependent with the rest of the clauses in the regulation and compliance bill. If we were to classify it as a currency, the taxes would be different from the case of classifying it as an asset or a commodity. Compliance addresses this issue in a broader sense.
One of the biggest concerns for compliance would be to address how the government can get the best possible revenue from the cryptocurrency market without putting up too much of a load on taxpayers. If the taxes are too high, it would profit the government but the profits on investors’ end would be significantly affected. If it’s the opposite case, the revenue on the government's end would be significantly lower. This is where the government would have to find a balance between profits for the national revenue and the profit for the retail investors.
Here are 10 of the major advantages we’ll have through a proper regulation and compliance for the Indian market:
- Helps create awareness, educate and build trust among general public
- Pushes the country towards a digital economy
- Legal backing by the government
- Safety for the investors
- Decline in scams
- A proper structure to determine whether to classify crypto in assets, currencies, commodity or security
- A base-framework for crypto taxes
- Reporting mechanism for suspicious transactions
- Ensures that cryptocurrencies do not hinder the flow of national currency
- Staying ahead of the world by taking a step towards mass adoption, not just in term of investments, but also business, innovation and job creation
As of February 2022, there’s no concrete set of framework by the Government of India on cryptocurrency regulation and compliance, but the government is actively looking into ways to regulate it for the best interest of the public as well as the national economy, until a formal bill is rolled out. On 1st February 2022, the Finance Minister of India announced 30% crypto tax as a part of the 2022 budget.
The Indian government is also looking into launching the nation’s own Central Bank Digital Currency (CBDC), which will hopefully provide liquidity to the Indian crypto market, and also help non-tech-savvy people better understand and learn about digital finance in a safer way, in-turn fostering the rest of the aspects around crypto such as DeFi, NFTs and DAOs. Apart from regulation, it would be interesting to see how the government plans to drive the education initiatives for not just the youth, but also people in the elderly age-group. An integrated course on crypto and digital finance for school and college students—irrespective of their field of education—can be a massive catalyst for crypto regulation and adoption in India.
Talking about the global standings, while most of the major regions in the world including the US and EU do not have any firm regulations for cryptocurrencies, but they're looking for ways to set up regulation and compliance at the earliest possible. Singapore and Canada have a very positive outlook on cryptocurrencies and have been working on its rapid adoption, while the President of El Salvador, Nayib Bukele announced made Bitcoin a legal tender on September 7, 2021, also making El Salvador the first country in the world to adopt Bitcoin as a legal tender. All that while Arizona, Miami and a few other states in the US have been looking into doing the same lately.
Here’s all you need to do in order to ensure a healthy crypto regulation in the nation:
- Educate yourself and people around you about the blockchain and cryptocurrency ecosystem. Check out ConsenSys Academy and Blockchain Knowledge Base, for everything blockchain and crypto—from technical topics, to tutorials on how you can get started with building in web3.
- Join ConsenSys and MetaMask community and follow ConsenSys Blog to stay updated with everything happening in this space.
- Keep yourself updated with all the laws and regulations that the government rolls out, by being active and vocal on social media.
- Learn about finance and digital asset management.
- Follow and adhere to all the laws and regulations being a responsible citizen.
Regulation and compliance remain as two of the most important, yet less talked-about topics in the crypto ecosystem. They’re necessary to make sure everyone has a fair exposure to the market and to maintain equity over equality. While the government continues to explore the best ways to regulate crypto, we, as responsible citizens should work towards educating ourselves and those around us on topics such as blockchain, cryptocurrencies, finance management and decentralized finance, so as to be prepared for the future of digital economy.