Emerging Technology think tank, Policy 4.0, has released its detailed report and solution for India to tackle the spectrum of regulatory risks the government faces with cryptocurrency. The report outlines a comprehensive policy risk framework for India with cryptocurrency and recommends India build its own “India Crypto Wallet” to tackle KYC, the inflow and outflow of cryptocurrency and monetary concerns.
The report was launched at Policy 4.0’s anniversary event in discussion with members of the Reserve Bank of India’s Monetary Policy Committee, as well as leading cryptocurrency regulators from other democracies including the Financial Services Agency, the markets regulator for Japan, which has extensively regulated cryptocurrency exchanges and the former Undersecretary overseeing Financial Crime and Terrorism Finance for the US Treasury. It was widely agreed that DeFi poses a rising monetary challenge with no clear global regulatory solution and good KYC in combination with existing tools would tackle illicit activity well.
In the Indian context, broad categories of risks posed by cryptocurrencies relate to financial stability, monetary policy, capital controls, illicit activities and investor protection. Different regulatory approaches have focused on regulation through VASPs (Virtual Asset Service Providers) / intermediaries or by solving the issue of classification of cryptocurrencies; however, these approaches fail to tackle decentralized activity and capital controls. No precedent exists globally for India to effectively mitigate monetary risks.
Cryptoassets are rapidly evolving, with new forms of tokens emerging that defy easy classification into either securities, commodities, utility or currency. The momentum of activity is also shifting away from centralized exchanges such as WazirX, CoinDCX and others and into Decentralized Finance (DeFi) platforms. India alone is estimated to have $1.25 billion in fund transfer through DeFi platforms, as estimated by a 2021 Chainalysis report. Cryptocurrency activity through Decentralized Finance (DeFi) channels has become a major monetary concern, and there are few global precedents to assuage the concerns of Indian regulators.
In this context, Policy 4.0. has built an innovative regulatory solution deriving from the core design of cryptocurrency systems, which tackle the persistent dilemmas in the Indian policy thought process. “The design derives from the premise that all cryptoassets, whether tokens such as Bitcoin, altcoins, NFTs, stablecoins, whether listed on a centralized or decentralized exchange, are fundamentally just a key pair, comprising a public and a private key,” said Tanvi Ratna, Founder of Policy 4.0. Ownership of the keys gives ownership to the asset. Both the custody of keys as well as transactions across the cryptocurrency ecosystem are managed by wallets such as Metamask, Trust Wallet and others, which become a de facto passport into the cryptocurrency ecosystem.
Policy 4.0 recommends the creation of an “India Crypto Wallet,” whether as public infrastructure or in collaboration with existing wallet providers. The India wallet is a unique de-duplicated wallet for each Indian citizen KYCed through the DigiLocker, which can manage all classes of cryptoassets as well manage integrations to global cryptocurrency applications and marketplaces. It can also differentiate between Indian and cross-border activity, and manage FEMA and other compliances easily. The wallet essentially becomes a gateway for various crypto platforms to integrate with Indian citizens. It also makes compliance seamless and easy for both crypto services and users, as they already have all their workflows optimized for wallets. The onus is on citizens to set up such wallets and crypto applications have to merely onboard verified wallets. This approach tackles the full spectrum of risks highlighted by Indian policymakers, which otherwise seem formidable to tackle. These features and risk mitigation measures are explained in detail in the report.
This innovative and simple solution is a first globally, to tackle financial stability, capital controls and other monetary risks. “This is a light touch approach that balances India’s need to reign in risk while promoting innovation and could position India as a regulatory model to follow as financial stability concerns rise globally with respect to cryptoassets,” Ratna remarked. This regulatory framework also builds upon India’s leadership in regulating fin-tech using both regulation and foundational technology infrastructure as India has done with the India Stack.