Cryptos will never be legal tender. Robust regulation is the only way forward

The duck analogy, often used to indicate calm at the surface with furious activity underwater, is reminiscent of India’s crypto regulation attempts. The visible calm hides the churn from all sides – be it the government, industry or users – but what this will throw up remains moot. Ambiguity on cryptos is probably more due to political and economic pressures than reasons of continued diffidence on categorisation and consequent choice of regulator, but these too have a bearing.

That cryptos are not and will never be legal tender appears to be stating the obvious, with this being an intrinsic sovereign right. Consequently, even if a nation issues a Central Bank Digital Currency (CBDC), it does not in any manner legitimise or imply permission for private cryptos.

While restraining cryptos from claiming to be legal tender appears trite, limiting its usage as a payment system is complicated. Cryptos first emerged as payment systems and continues to be used as such – incentivised blockchains, the metaverse and non-fungible tokens (NFTs) being top of the mind examples. In fact, research indicates that NFT valuations are based more on volatile crypto values than of the NFTs themselves. Using cryptos as payment systems is no longer about paying for coffee or content on the darknet. It is usage for payments, such as on blockchains, within cryptos (to miners), for NFTs or online gaming that poses the first hurdle in the policy framing for cryptos.

Classification of cryptos is the first step to regulation. The Supreme Court, in the Internet and Mobile Association of India v. Union of India case, categorised cryptos as a payment system and indicated that the Reserve Bank of India (RBI) was well within its rights to even ban cryptos but through due process. This judgment, which in itself is flawed, is unfortunately misquoted often and the primary directions given thereunder have been ignored. The case dealt with cryptos within limited scope but may form the basis for formulating crypto legislations.

Cryptos, as security instruments, were mooted many moons back and also adapted, as such, in multiple jurisdictions including the United States (US), which may be used to illustrate the complexities. US’s Howey Test i.e the triple test of “investment of money, into a common enterprise, and with reasonable expectation of profits through efforts of others”, does not explain the absence of intrinsic value that is a marked difference between existing securities instruments recognised in India, as opposed to cryptos. While the US’ classification may seem well entrenched, the repeated actions of the Securities and Exchange Commission (SEC) against cryptos, including for its issuance, lending or crowd funding for crypto launches, indicates that regulation has not lent certainty to cryptos or security to investors.

Even this classification as securities was questioned by the SEC’s chairman himself in 2018, who in turn classified it as “commodities”. The recent executive declaration by US President Joe Biden is a warning note to the crypto industry in the US. It is also a caution to India to pause before copying foreign legislations blindly.

Scams relating to issuance of new cryptos, crypto ponzis, money laundering and cryptos to facilitate crimes are but the tip of the proverbial iceberg. Certainty through criminal provisions would lend value to the crypto industry and to citizens alike.

Cryptos in themselves are opaque to investors, who have jumped in without comprehending the product. Volatility, scams, absence of transparency and accountability add layers to be addressed. Yet, to say that exponential adaptation of cryptos impedes law-making is too simplistic to be sustainable. Centuries-old legacy laws in India are classic examples of displaying dynamism in law to adapt to evolving scenarios.

Lack of focus and pressures of meeting diverse stakeholder claims appears to be delaying crypto legislations in India, more than the complexities. Ensuring focus, taking baby steps in introducing enabling legislation (such as for blockchains) and protective measures, instead of an “all-or-nothing” attitude, may be a preferred first step to robust regulation.