Paper: GS – III, Subject: Economy, Topic: Financial Markets, Issue: Crypto regulation scenario in India.
Context:
There is an urgent need for a comprehensive regulatory framework for cryptocurrencies in India focusing on investor protection, market transparency, and the global regulatory race in digital assets.
Key Highlights:
Recent Incidents:
- Security breach: A crypto exchange suffered a $44 million hack.
- WazirX lost $23.4 million in 2023. These incidents show the dangers of an unregulated ecosystem.
Potential of Digital Assets:
- Huge potential: Digital asset market can reach $2 trillion by 2028 (Standard Chartered).
- Reliable mode: Crypto payments and stablecoins may become routine tools for transfers, payments and financial innovation.
Arguments Against Crypto Ban:
- Crypto is too big and mainstream to ban outright.
- Investors have already moved to private wallets.
- UPI and e-rupee may cover payment functions but not investment functions of crypto.
India’s Position on Global Crypto Adoption:
India leads in global crypto adoption in 2024. As Chainalysis report:
- India has 119 million investors, constituting 20% of global crypto holders.
- Retail investors dominate: 90–95% of users but only 30–50% of trading volume.
- Whereas High Net-Worth Individuals (HNIs) and institutions constitute just 4–10% of users and drive 50–70% of exchange turnover.
- US: 53 million investors while Indonesia has 39 million.
- Though India’s crypto investor base is massive it lacks regulatory safeguards. This regulatory void has led to the proliferation of crypto exchanges.
India’s Regulatory Vacuum:
- Lack of clear framework: No clear framework to regulate cryptocurrencies.
- Lack of legal clarity: Government quick to tax crypto profits, but slow on legal clarity or investor protection.
- Incoherent approach: S.C. Garg (former Finance Secretary) stated that India’s crypto policy is piecemeal, passive, and unsustainable.
International regulatory developments:
- US passed the Genius Act for stablecoin regulation emphasising on stablecoins backed by liquid assets (e.g., US Treasury bills). It mandates Monthly reserve disclosures to enhance credibility.
Way ahead:
Regulatory Action: Government & RBI should fill the regulatory vacuum collaboratively.
Key Pillars of Crypto Framework (as suggested by S.C. Garg):
Conclusion:
Delays in regulation could lead to massive investor risks. A structured crypto framework would support innovation protect retail investors. and strengthen India’s position in the global digital economy.
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