Crypto investors in India were quick to jump on the bandwagon, but the legislature is still playing catch up. The system of taxation of crypto is perceived to be harsh and discouraging for the future of crypto in the country. Should India be so quick to reject crypto? Could there be a different way to go about the same? In this article, we will delve into how crypto could be regulated in general.

Need for Regulation

Let us first look at this from the lawmaker’s perspective. They see crypto as an excellent enabler for money laundering and other illegal activities. The crypto market is also largely susceptible to ‘pump and dump’ schemes, fake trading volumes, frauds, etc. Certain bad actors can anonymously carry out transactions with their identity totally hidden from law enforcement agencies. Further, if our economy gets increasingly dependent on crypto, it opens itself up to many financial risks.

Despite all the above issues, it will do more good than harm to regulate crypto in a reasonable manner. Crypto-related technologies increase the possibility of further innovations in the fintech space. These innovations take place in countries that are welcoming of crypto. Harsh measures against crypto would discourage people from taking the legal route and look for grey areas and riskier means to carry out transactions. 

How should it be regulated?

While I might personally be grossly under-qualified when it comes to policy making and passing of regulations, I can certainly offer certain inputs that may be taken into consideration:

• Limit the number of means through which people can transact in crypto: Even though all you need to access crypto is an internet connection, one needs to have significant technical know-how to stay anonymous from the authorities. That leaves the majority of people forced to use exchanges to simplify their needs. It could be mandatory to only use crypto through approved crypto exchanges. This brings most of the crypto customers under one roof where it is easier to regulate.
• Separate license for dealing in crypto: Just like we have a banking license and separate registrations for Non-Banking Financial Companies (NBFCs), etc., we could have either a separate registration or have a separate license for dealing in crypto. This allows for the regulation of crypto exchanges.
• Setting up of a regulatory body: We have the Reserve Bank of India (RBI) to look after the regulating the banking sector, the Securities and Exchange Board (SEBI)  of India to look after the securities market, we could have a separate body to take care of the governance in the crypto space.
• Mandate KYC norms for crypto customers: This regulatory body could prescribe that all customers are required to submit documents to verify their identity, which is in line with the KYC norms followed by banks. The problem of anonymity in crypto transactions would be dealt with in this case.
• Higher identity verification standards mandated for purchase of high-value assets: Money laundering happens in three basic stages: Placement, Layering, and Integration. Despite all the above measures, there will still be bad actors using crypto as a means of funding their illegal activities. They will ultimately need to use their profit to purchase high-value assets genuinely. Thus a ceiling could be prescribed beyond which it would be compulsory to furnish multiple identity proofs that will be verified and become an integral part of the purchase process.
• Cooperation with international regulatory bodies: Large-scale money laundering does not limit itself to the geographical boundaries of one country alone. Further, exchanges might also have an international presence. It would be prudent to set up an information-sharing mechanism specifically targeted at crypto transactions in order to verify the authenticity of suspicious transactions. This would also go a long way to help solve the problem of revenue leakages.
• Accumulation of crypto-reserves: As part of safeguarding its economic interests, India has amassed a large amount of foreign exchange reserves. It would probably help to hold crypto reserves in a similar manner.

Conclusion

It is in no way a simple or easy task to bring forth regulations in the crypto space. However, with the popularity of crypto increasing among the youth of India, it would be beneficial to bring regulation and also a reasonable taxation policy that facilitates investment and innovation. The benefit could also be in the form of a new tax avenue for the government.