NI Bureau
India’s pace of financial technology and the digital economy has seen substantial transformation in the last decade. Opportunities and challenges are equally tough within the country. Virtual digital assets-VDA, often called cryptocurrencies- have changed the world and the national financial scenario. The lack of an all-inclusive regulatory framework for operations in VDAs remains a challenge before India.
On 16th December, the Finance Ministry shed some light in the Lok Sabha on India’s policy for regulation of VDA. Government has commented upon how the borderless system has to be dealt with international cooperation into proper regulations. As of 7 March 2023, the VDAs come under the scope of Prevention of Money Laundering Act, PMLA, under which, tax revenues are collected by VDAs and fall under the Income Tax Act, 1961. Such steps, although positive in nature, alone are not enough without a balanced regulatory approach. Putting VDA under the slab of taxation cannot be an alternative to the regulation.
International Cooperation and G20
India acted swiftly in capturing the G20 presidency as an opportunity to address the VDAs impacting the world. Along with the IMF and the FSB, India initiated the “G20 Roadmap on Crypto Assets” approach of innovation combined with risk trade-offs. It would depend on the international consensus getting aligned with country-specific risk assessment; it takes one back to the theme of innovation versus investor protection-innovation balance by India.
In this regard, innovation in VDA space for India is the crux since that would actually drive further opportunities and boost further its digital transformation journey, unleashing new investment vistas. Any such cost towards innovation cannot happen on behalf of a reduced investor or even financial security situation. It’s about such dangers that come around under market vagaries, money laundering, evasion, or fraud-the strong regulatory base can be said as the ultimate solution.
The statement of the government itself says, “Investor protection measures can only mitigate risks to a certain extent,” which makes VDAs inherently complicated and risky. This is not a domestic policy issue but an international collaboration call.
What Should Be There in An Effective Regulatory Framework?
- Global Standardization: Since VDAs are borderless, India needs to be proactive on international forums such as G20 so that the Indian legal system can be brought abreast of international standards.
- Stakeholder Dialogue: There is a dialogue with stakeholders and international bodies, but this process should be more open and participative. The discussion paper on regulation of VDA should be put in public domain and subjected to wider consultations from public and experts.
- Institutional Structure: A regulatory special authority for VDAs would go a long way in innovation and risk management.
- Financial Literacy: There can be efforts in the promotion of financial literacy among VDA investors who shall then understand all the risks pertaining to this category.
- Technology Leveraging : It will also make use of Blockchain and other such technologies to achieve a very high level of transparency and data protection, in the process of regulation.
Conclusion
India has not arrived yet in terms of the regulation of VDAs. The government only says that the process is moving on in hand currently without mentioning when it would complete. For it to be initiated in an emerging country, its introduction should happen as soon as possible with almost no delay.
The interplay between innovation and investor protection needs to be handled sensitively for this purpose. It can keep the economic interest safe while becoming a global leader in digital financial space if able to present holistic time-bound regulation.
Regulation of Virtual Digital Assets will be the future finances of India. It would need careful, strategic, and long-term moves to make India an innovation hub with a sound and stable economy.
