Is Regulatory Forbearance Hurting the Cryptocurrency Market?
Given the nebulous nature of cryptocurrencies, there has been an ongoing turf war over whether it would be the RBI or SEBI which has appropriate jurisdiction to regulate them.
Regulators in India have been indulging in a policy of forbearance when it comes to framing regulations for the cryptocurrency industry. Given the nebulous nature of cryptocurrencies, and the ongoing debate over whether it can be classified as a currency, a derivative or security, there has been an ongoing turf war over whether it would be the Reserve Bank of India (RBI) or the Securities and Exchange Board of India (SEBI) which has appropriate jurisdiction to regulate the cryptocurrency industry.
This regulatory conundrum has already played out in the U.S. with the Federal Reserve attempting to fit cryptocurrencies within the definition of a currency and Securities and the Exchange Commission (SEC) assessing its ability to regulate cryptocurrencies as a security. The SEC in its recent investigations into the Decentralized Autonomous Organization’s initial coin offering accepted that whether ‘tokens’ are securities will depend on the particular “facts and circumstances”. This highlights the regulatory challenges in regulating an industry as amorphous and metamorphic as the cryptocurrency industry.
It would perhaps be safer to classify cryptocurrencies as an ‘asset class’ rather than attempt to fit cryptocurrencies into one or the other rigid definitions of a security, currency or derivative. This would enable both the RBI and SEBI to regulate various aspects of cryptocurrencies without requiring a bifurcation of regulatory purview which appears to be impeding either SEBI or the RBI from taking up the mandate of regulating bitcoins.
Regulatory recognition, albeit at the cost of regulations being imposed, would to some extent, result in the recognition of the legitimate uses of cryptocurrencies for certain applications, thereby resulting in its widespread acceptance whilst clearly demarcating the limits of its legitimate end use. In an exchange controlled economy such as India’s it becomes even more relevant for the RBI to exercise some controls to regulate or at the very least oversee the use of cryptocurrencies to check its use to circumvent foreign exchange regulations.
Even if one were to argue that legitimizing the use of cryptocurrencies is contrary to regulatory intent of RBI and SEBI, the current regulatory forbearance is indefensible. The lack of a regulatory framework today not only impedes the wider acceptance of cryptocurrencies given that certain cryptocurrencies such as the bitcoin have garnered the notorious reputation of being used as the currency of choice for the trading of contraband on the dark web.
The Malta Financial Services Authority, another regulator grappling with the regulation of cryptocurrencieshas succinctly summarized the global regulatory concern regarding cryptocurrencies in its observation that virtual currencies are vulnerable to misuse for criminal activities such as money laundering since transactions in virtual currencies are largely untraceable and provide a high degree of anonymity. Once cryptocurrencies garner such a reputation, the lack of regulatory sanction results in cryptocurrencies being viewed with undue suspicion, almost as if it is intrinsically associated to illicit activities.
Usually, in the wake of incidents such as the collapse of Mt. Gox a bitcoin exchange which affected over 25,000 individuals and the crackdown on online marketplaces such as Silk Road that facilitated the trade of contraband, regulators are compelled to take a tough stand and impose harsher regulations. The decentralized nature of cryptocurrencies leaves law enforcement authorities with limited options, to either take action against or close exchange platforms, or impose measures to prevent access to platforms offering cryptocurrencies. The combination of these factors inevitably results in a regulatory clamp down that stifles an industry inextricably linked to technological innovation.
Globally, regulators have adopted the approach of implementing a ‘regulatory sandbox’ regime specifically in the fintech industry to permit businesses to test their technology and deploy proof of concepts within controlled parameters of a ‘regulatory sandbox’. This enables regulators have close oversight and thereby have the ability to frame regulations which specifically address practical challenges and nuanced issues which have arisen during the controlled sandboxing tests. It also allows regulators to be better equipped to preempt permutations and combinations of typical issues which may impede the effective regulation of technology based products such as cryptocurrencies.
With no regulatory sandboxing regime in India, there is a very real risk that regulators may favour a binary approach: of either imposing a complete ban on cryptocurrencies, or abstaining from attempting to regulate them. One can hope that Indian regulators will attempt to strike a balance between protecting public interests while ensuring that restrictions imposed allow for the development of products derived on the underlying blockchain technology. Perhaps the approach that could be adopted is the implementation of a regulatory regime that sets down overarching principles that prevent exploitation of regulatory loopholes against the grain of regulatory intent and adapts with the metamorphosis of technology.
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