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Last month, the El Salvador government announced it would accept Bitcoin as legal tender, the latest breakthrough in the ongoing debate, about cryptocurrencies and the way forward.
In India, too, the debate has grown in volume. While the Indian government and the Reserve Bank of India (RBI) are weighing the pros and cons of a free cryptocurrency game, the emergence of cryptocurrency exchange apps shows that markets work before regulation.
While we discuss the scope and desirability of cryptocurrencies, here are some of the factors that need to be weighed.
Acceptance of Innovation
The power to spend is one of the cornerstones of a modern nation-state. to compete with this power is destined to offer resistance. The Indian government and RBI should resist the temptation to view cryptocurrencies as an alternative to fiat currency. In terms of the regulatory sandbox, it should allow private parties to use cryptocurrencies for mutual contracts. As usage increases, we will learn at the expense of private capital.
Blockchain, the underlying technology on which cryptocurrencies are based, relies on the power of anonymous participants: If the asset class wants to be included in the formal financial system, its owners cannot remain anonymous.
Our financial system is based on and strives to identify all participants according to the KYC (Know Your Customer) doctrine. Therefore, all cryptocurrency holders must disclose their identity, the source of the funds they have distributed, and the end use of the currencies must be monitored.
The KYC disclosures will also bring the use of cryptocurrencies under existing anti-money laundering regulations. Questions have also been raised as to where cryptocurrencies, an asset denominated in U.S. dollars, fall under the scope of the Foreign Exchange Management Act. These holdings can be assets of the global investor club and attract the current tax regime applicable to global companies.
The importance of saying that there is no support when cryptocurrencies fail cannot be underestimated. The government must clearly communicate that cryptocurrencies are not governed by the state, are not part of a deposit insurance program, do not guarantee the investments made, and they are not considered collateral for loans from a financial intermediary. Remember that you are investing in an asset that has its own unique price and liquidity risks.
Treating cryptocurrencies as financial assets operating under the contracts with private parties paradigm implies that they are regulated by the capital markets regulator: Sebi. Sebi has extensive experience in regulating a range of financial products and in the supervision of the exchanges where these instruments are traded.
Ebi also has experience in the development and management of participating independent depositories that provide transparency and risk management frameworks for financial institutions. capital market products.
Our financial system is based on and strives to identify all participants according to the KYC (Know Your Customer) doctrine be monitored. KYC disclosures will also bring the use of cryptocurrencies under existing anti-money laundering regulations.
Educate and Inform
As with financial products like insurance and mutual funds, the government and regulator should focus on educating and educating investors about the risks associated with crypto.
Broader Use of Blockchain
Cryptocurrencies are based on blockchain technology, a publicly registered, verified, accessible and immutable information stack for a country our size, where the design and structure of the state should make accessing information a huge task. Any innovation that facilitates access to information should be encouraged.
Blockchain could be useful for digitizing and updating land registers. The government can create a chain of blocks and make land registry information more accessible. Hence, a total ban on the most popular product (cryptocurrency) in blockchain technology could deprive us of its other, potentially more shocking uses.
Let the markets play
Cryptocurrencies are products of free markets, they are an example of the voluntary participation of market players and private capital that tests the limits of a new technology.
The government and the RBI should focus on ensuring there are no spill overs from private contracts going bust on public markets, and restrict any regulation at this stage only on achieving that.