Act now: Crypto regulation cannot be left for another day

Mint

6 days ago

India topped global crypto adoption for the second year in 2024, according to Chain- alysis, a US-based blockchain analysis firm, with 119 million investors, nearly one-fifth of all crypto holders worldwide. The US ranked second with 53 million investors, followed by Indonesia with 39.
Telling as these estimates are, the ranks could soon change. Last Friday, US President Donald Trump signed into law the Genius Act to create a regulatory regime for stablecoins. American investors, unlike their Indian counterparts, will now have the comfort of a regulatory framework.
America's new law requires stablecoins—or crypto tokens whose value is pegged to a regular currency—to be backed by liquid assets such as US dollars and short-term Treasury bills.
Also read: Mint Quick Edit: Time to rescue crypto from policy limbo
This enhances their credibility. Issuers must also disclose the composition of their reserves every month. Consequently, digital assets could become a routine way to make payments and transfer money. Stablecoins, mostly designed to maintain a 1:1 dollar peg, are already in heavy use.
Under the new law, the market could grow to $2 trillion by 2028, as Standard Chartered Bank estimated. For comparison, the market for gold is projected to grow to just $458 billion by 2032, according to Fortune Business Insights.
India, alas, is yet to regulate cryptocurrencies. Even as India's wealthy and not-so-wealthy seem drawn almost irresistibly to crypto assets, despite the risks, we remain in a regulatory vacuum.
The government has been quick to tax crypto gains, but has not been remotely as agile in clearing the fog on digital assets or laying down rules. As former finance secretary S.C. Garg argued in a Mint oped, India's approach to crypto assets has been piecemeal, passive and systemically unsustainable.
A long-awaited discussion paper on the subject is yet to be released. Meanwhile, investors in these digital assets appear to be swelling steadily.
According to reports, retail investors dominate crypto exchanges in India, making up 90-95% of users, though they account for only 30-50% of trading volumes, while high net-worth individuals and institutions are fewer in number (4-10%) but drive 50-70% of turnover with larger trades and their frequent use of derivatives.
India's regulatory vacuum has seen several crypto exchanges rush in to meet demand, but the safety of these platforms is a wild guess. Take cyberattacks. Just last week, CoinDCX suffered a cyber heist of $44 million, with this money reportedly stolen by hackers from an internal account.
Though the exchange said all investments are safe, the incident highlights the need to make this market both safer and more transparent. Last year, WazirX had lost $234 million to theft.
Also read: Subhash Chandra Garg: Don't vacillate on a regulatory framework for crypto assets
These are not small amounts and it is too late for a crypto ban. At least stablecoins need legal recognition (and rules). Sure, it could be argued that UPI already eases payments and that the central bank's e-rupee can serve the smart-money functions of crypto.
But investors have voted with their wallets for private tokens. In this scenario, we need action of the kind taken by our regulator of capital markets, Sebi, to make the market for equity derivatives safer for investors.
Sebi must now join hands with the government and central bank to fill the crypto vacuum before retail investors burn their fingers.
Also read: Stablecoins are on the rise. Bond investors should pay attention.
Garg has proposed mandatory licensing, transparency, insistence on Indian jurisdiction and the functions of exchanges, brokers, aggregators, custodians and other entities kept apart as the four cornerstones of a crypto regulatory framework. That would be a good start.