History’s Message For Virtual Digital Asset Regulations
Observations about Virtual Digital Assets - in my previous OpEd, touched upon the aspects of how Indian consumers are adopting the purchases, despite high taxation. It would be relevant to learn from how the history of the financialisation of assets shaped over the centuries. And how moral sanction and regulatory embrace happened, either as a counter view or at times, even convergence. Law and Morality are two different concepts that govern the way humans behave. Morals are principles or standards of behaviour that define human conduct within society, but don’t define any compulsion to follow them. Law is a set of rules and regulations that all people are obligated to adhere to, if they want to live in a society's boundaries. The relationship between law and morality has inter-dependencies between them, but not the same. When we think of these newer emerging asset classes of VDAs, or think of them as whimsical newbies as one’s opinion permits, we have to look at past learnings of how humans and society, and ideology around finance evolved.
For example, early cavemen did not have paper or paper currency or coins or banks to save his material possessions. The then-contemporary and financially evolved early 20th-century bankers did not trade in carbon credits or blue financing. The evolution of digital technologies moots fresher potential in building convenience and comfort for humanity, allows for global transactions including complex ones - both in terms of assets, as well as structured across multitude of across-border-regulations. But, when new emerging technologies are the basis of newer asset classes, it worries us, and we assume the worst of them.
Who would have even thought that we would be transacting finance through mobile phones? By native intelligence, should we have distrusted anything that was not physically touched or seen ? Sometimes engineering and scientific innovations, social discoveries or political compulsions also lead to new asset classes. For example, it was only because of the political understanding around the need for Climate action, did the world ‘create’ an opportunity around Carbon credits and climate financing. That climate-asset-class came up as a political outcome to a global discussion. With the outcome of wealth that the Industrial Revolution created, and the financial structures that it posed and the creativity needed for ownership of those entities, came the idea of Company Equity Capital and Company Stock. Debt and bonds became assets since humans had transferrable money. Similarly when governments needed to fund wars that were out of their financial reach, they issue started treating Sovereigns as assets to be funded and traded.
Social approval
The world saw the Gold rush that drove societal frenzy to the daring of human courage, as well as to the depth of human depravity. Yet over time, forgetting the human tragedies, the 20th century governments also pegged their formal financial currencies to gold! Centuries ago, people traded in copper, pottery, etc. Can we take a stand today that a vintage pot of a few centuries age, should not have value today? Instead, the private investment market recognises some of those artifacts as of immense monetary value, and transactions happen between the willing buyer and seller. Most often without any regulatory interface. Most of my generation collected fancy flipbooks of sports stars, or even bottle caps to exchange for a reward of a cap or a poster or a T-shirt. These were promotion campaigns run by large corporations with open advertisement campaigns across the country. For all the value they held years ago, today it’s probably not even salvage value. For example, in the past three decades, Indian society has shown its acceptance of water as a paid-product (compared to the lesser priced public-good). Such is the nature of markets - that which the society values on what it thinks is relevant, rare or rich.
For centuries, the Indian society saw investments in land and gold. Even the formal banking system has existed in India since the mid 1800s. Until nearly Indian independence, the much popular Sahukars used to lend against mortgages - probably the common and largely used asset class. Yet until a generation ago, credit was overall seen as a sin or a bad moral behaviour in social context (except for business purpose), while regulations permitted borrowing. In the same timeframe, our country has built a fairly participative capital markets, a growing alternate investment asset class, a shallow debt market and growing bond market, and so many financial markets. For a nation that believed in physical land ownership, we have happily embraced fractional ownership, of at least, realty to begin with. Time will tell us how society and regulations look at change in generational-attitude about finance from the non-digital-natives to the digital-natives.
Newer assets - bubble vs bravado
Earlier, humans traded in tangible physical materials for financial gains. Then came the concept of services being priced. Today in the 21st century, we face the issue of looking at Virtual Digital Assets - something that’s not physical or tangible and not a service in its entirety. This is what creates a challenge for most of regulatory framework in valuing the asset, if at all it can be called one. It’s the dilemma of what to call such an ‘ object’. So from naming-trouble for such objects arises objections to its very existence. If there is sufficient reason to believe about anything that creates long-term public-injury, governments and regulators have to ban such product or service. But social obligation for the governments also requires them to build mechanisms to make sure that the specific product is not available underground !
One hopes for healthy debates on newer types of assets and asset classification in capitalist markets with socialist guardrails, and believes that popular narrative will avoid dramatising the moral struggles associated with asset acceptance. For example, theoretically, the volatility of virtual digital assets could come down when it gets more regulatorily established. But then, the regulatory establishments cannot make the volatility alone as basis for their regulatory philosophy. This reminds one of the observations about the Indian Housing Finance sector. Not too long ago, the common joke in the sector was that the biggest and most unseen competitor to all the HFCs was the ‘father in law’, who would give interest free loan for the young married couple to purchase the house ! And the HFCs would borrow monies, primarily from the banking system, to lend onward to the consumers. If they had only said, ‘what if banks give home loans, and we are not needed as a separate asset class’. But look at the sector today, and it has grown well in the past two decades.
The noise around negatives about VDAs seem to overtake the positives. One cannot claim any moral benefits or morality based positivity. One has to make economic rationale for having it. Else the worries will continue about unavoidable, unmanageable, unwanted consequences of the new technology. The question that’s been asked without answers in many of the techno-financial policy conversations is this : should one regulate directly the technology itself ? Or regulate the users on what they do with the technology ? The current concerns seem to tend towards worries of such a technology being a major enabler of a wide range of criminal behaviors, creating risks for the rest of the society. But isn’t technology, as a concept, ethically neutral? Isn’t that there could be “bad actors” in any financial transaction or market or asset class ?
Same was seen in some of our Micro finance sector. For poor behaviour of few actors in the sector, ostracising the sector for sometime, and equally depriving the dependant borrower communities, we did clean up the sector, and bettered the governance. Even our Indian capital markets have had scandals, and consumers being deprived of their life earnings, loss of funds, etc. Does it make the entire industry bad ? No. We did clean up those acts, and we have further built in guardrails for the future.
India & VDA
India’s taxation approach and policy development approximates VDAs to gambling and betting. Well, the sin industries like horse race betting, gambling, tobacco, liquor are also the largest revenue earners for many governments, and employs large population across downstream activities. Smoking in injurious to health, with proven negative health outcomes. Despite warnings for decades, have governments been able to stop it ? Rather they continue their caution campaigns, and think that their moral obligation and financial acumen of higher taxation would stop smoking habit. So is this an example of what’s legally permissible, and morally wrong ?
Importantly, the lens through which one sees a product can be a determinant of how to shape it. For a moment, if one visualises VDAs as assets, a simpler solution of creating a bench of talent and subject matter expertise at the securities regulator is a possibility. In this endeavour, one assumes that it’s equamity state amongst all the financial regulators. If we can bring in regulatory boundaries around VDAs as asset class, then it would provide for consumer protection, in terms of KYCs for all investable amounts, and importantly to regulate all VDA exchanges under Indian regulations. Let those assets not be treated as currencies, leave alone being private ones. That would be akin to any one having Monopoly game money, but being used in real life monetary transactions. The regulatory worry about consumer protection is burdensome, but what can they do for consumers’ dare or even stupidity at times ?
The Lord Voldemort moment
With every new crisis, the regulators, the non-state market actors have a new heart and seem to be in their quest of moral redemption. And yet, the regulations are about allowing businesses to make profits, within legal framework. Regulators are expected to be like Gods. Omnipresent and omnipotent. In a digital world, theoretically it’s a possibility. But practical issues will persist. In a capitalist market, regulators can’t afford to play God, with no recourse is a scary construct. One that the other pillars of democracy would oppose. Regulators playing moral teacher is always a touchy subject. They have to steer the society for long term positivity. Yet have to take short term harsher and unpopular calls.
Many discoveries, initially were pooh-poohed as failures. But somehow many of those have shaped our lives. Also anything new has a way of shaping up or dying away. So I think how digital innovations could impact our lives is a wait-n-watch. What the future holds for technological, scientific, and societal progress is unknown. So one has to learn - never say never. It required centuries of development before debt was formalised into financial assets.
VDAs are at the very heart of currently being a regulatory humpty-dumpty. They are neither here nor there. It could emerge as an asset class, or subset of another one. What history of finance tells us is that the emergence of new asset classes is inevitable. Sometimes it might take a century, and other times it may only take years. In short, as long as humans and society exist, there is potential for the emergence of new financial asset classes. Any of the newer asset classes could test the boundaries of regulatory sovereignty. This is where one has to draw a line, in favour of the regulatory authority for financial stability and fiscal resilience.
In the run-up to Web3 scaling up, India can lead global policy stewardship on Web3.0. We need to use consumer guardrails as a guiding light. There in lies the heavier challenge for regulators - how to eliminate bias of the emerging technologies and the due worries of the unknown, and their institutional prejudices on newer emerging financial assets. Yet the compulsion of being morally virtuous has to outlast any moral hazarding. The larger worry is no one wants to be the fall-guy in case something implodes.
