“Satoshi Nakamoto” is a name that stormed the internet. A pseudonymous identity who was purportedly involved in the mining of the first bitcoin. 

I know it sounds like a mystery. But, let me tell you that he had already published a paper describing peer-to-peer electronic exchange. Way before he was found inventing the same. A white paper is written in flawless English, and published in 2008. [1]

You may think why are we even discussing this story over here? 

Because we are talking about regulation on crypto after all! 

Before delving into the impact of regulation, let us understand what happens in the process. 

Does that make Crypto relevant in the first place? 

So, let us ask

WHY CRYPTO? 

You would know the answer if you followed “The Great Economic Depression” closely. 

Yes, I have. But, how does that relate to crypto? 

Well! It relates to Crypto the most. If we were to look at one motivation behind the invention of crypto. That surely would be the economic depression and third-party intervention. 

How does crypto fix them? 

Through decentralization. The motive behind crypto has always been to reduce the intervention of the third party. The government and banks in general. So our hard-earned money and investments are not subjected to disastrous policies and decisions of the third party. 

That explains how the impact of economic depressions could have been significantly reduced had we invested in crypto. As the crypto value is dependent upon a range of factors. Not subject to a single point of failure. [2]

Sounds like such a revolution! 

But, does regulation help this revolution stay relevant? Let us find out. 

How does regulation impact crypto? 

To understand, let us take an example of the banking sector. 

Ensuring privacy has always been a major USP of crypto. This kind of privacy gets very crucial especially when we talk about banks in general. It is not possible these days to get a bank account without sharing sensitive bank information. 

And how is this data misused? 

Take a look at the recent data breaches from these prestigious banks. Around a whopping 3.2 million, debit cards were compromised in the data breach of 2016. Prestigious banks including ICICI, HDFC, and SBI were among the worst hit. [3]

This demands an alternative. Crypto could have been so! 

But regulation has a different story to tell. 

To know more, let us understand how crypto will be regulated across different sectors. 

CRYPTO REGULATION. How? 

The regulation is a consequence of the Supreme court vs RBI judgment. 

What is that? 

Well, that was an interesting judgment where in a very odd situation, RBI fell weak before Supreme Court. The Supreme court ruled out any possible reasons for not using crypto as a legal tender. [4]

But, as a directive, also asked the government to look into the possible ways of legalizing cryptocurrency. When legalization comes into the picture, the regulation does. 

Regulation is not all bad!

What supports the claim? 

The recent theft of bitcoin does. Where hackers have been carrying out attacks not only to steal the coins but to also lower the exchange rate. So that, more & more players start selling bitcoin quickly. Wondering what it does? [5]

– aids the process of hacking.

Seems like hackers are getting smarter day by day! 

Hmm, and so should the law. 

Grievance Redressal through regulation. 

With Crypto companies getting closed or running away from responsibility after hacking, regulation can emerge as a savior. Any mishappening or theft can be addressed through a grievance redressal only when the government takes responsibility. 

Regulation is a good way to settle disputes and set a strong malware – spyware system to alleviate hacking. 

Does that mean regulation is all good? 

Depends upon how Crypto is getting deployed across various sectors. 

REGULATION ACROSS DIFFERENT SECTORS

We know cryptocurrency is exciting! 

That explains why almost every sector is keen on adding crypto as one of its core offerings. 

Even the ones who see a direct competition with it! Yes, you guessed it right. 

Let us talk about banking. 

Crypto and Banking

Crypto and banking have always been put fiercely opposite each other. 

The major offering of crypto has always been privacy and easy transfer at a low transaction. 

A complete odd with banking services! [6]

Yet, with the rising popularity of crypto, even popular banks like HDFC, and ICICI have started offering crypto services. But, how are they doing that? 

By making KYC mandatory for even crypto-based services. 

How is it different then? Wasn’t a major USP of crypto – privacy too. 

It was. But maybe they are offering a better return? 

The collaboration of banking firms with crypto-based startups is offering returns as high as 14.5%. The easy accessibility of banks and perpetual innovation of crypto startups. Such a perfect combination!

This explains the collaborations of banks with these early-age crypto startups and also with major cryptocurrency exchanges. [7]

Okay, banks seem to thrive! And business? 

Crypto and Business firms 

Crypto is on the rise in business firms too. They are used for varied purposes. From transactional to avenue related. The companies have been leveraging crypto to its best. 

These firms use crypto for transactional purposes through currency conversion. What’s more interesting is that they also use crypto for safely controlling the capital of enterprises. Regulation in this industry may mean the registration of service providers with organizations like FinCEN. 

As all these benefits are often enabled through a 3rd party firm, usually a crypto business/startup. [8]

So, why don’t we talk about the most important stakeholder of all? 

The crypto startups! 

Let us discuss regulations across crypto startups. 

STEPS TO REGULATION ACROSS CRYPTO STARTUPS

Regulation across crypto startups would mean GST. It would also mean monitoring promotions and investment. 

Well, it can mean a lot of different things depending upon the country. 

Let us see what that means in India. 

The Panel Discussion 

The Indian government is all set to set up a panel and discuss the measures for establishing a regulatory framework. One thing is surely clear after the Supreme court judgment. Crypto is not getting banned. Hurray! 

But how things unfold depends upon how the government takes control. Though no concrete decisions have been made, many speculations have floated on news. 

Some say it is GST that would do the best. Some favor an outright ban on bitcoins of a certain kind. Some believe in a strict regulatory framework. 

Oh, that is too much to absorb. Let’s get into it one by one. 

THE GST 

The union budget 2022 has announced a whopping 30% of taxes on crypto incomes. 

Isn’t that discouraging to the crypto community including those thousands of budding startups?  [9]

Undoubtedly. But, the government has presented strong reasoning. Let us know what is that. 

According to them, Digital currencies often escape any protection from the side of the government. Therefore, crypto must be considered a “good”.  

Sounds interesting! But this assumption depends on a lot. 

Mostly, it depends upon how well the government is capable of containing the fluctuations in crypto pricing. Since it is a commodity now. 

So let us understand the supply chain corundum – the reason behind fluctuations. 

Supply-Demand gap, Mining, and GST 

The major reason behind Crypto price fluctuation is the gap between the supply and demand chain. 

And how do we fix this? The government will! At least they say they will. 

Let us see how. 

If the supply is made proportionate with the demand, the price fluctuations shall reduce. And crypto hits the commodity list! 

But it is not going to be easy as the government will have to take charge of the local country-based mining required to produce cryptocurrency. Then the cost incurred will then be offset by GST. 

Hmm. Looks simple. 

On the ground, it may not. 

Who is the regulating body? 

While we have decided on all this GST, mining, and regulation. The next step is to set up a regulatory body. RBI or SEBI, who is going to be the regulatory body? 

But, as RBI is planning to come up with its crypto, most likely it will be SEBI. [10]

Or who knows they will set up a different regulatory body altogether. 

Plans have been made. Everything has been laid out? 

What’s stopping us now? 

It is a not-so-smooth implementation. This isn’t a surprise to Indians. Implementations have always been difficult in India. But, what makes it even more difficult here for crypto? Needs an answer surely. Let us look into that. 

IMPLEMENTATION – A HURDLE DISTRESSING STARTUPS 

While a lot has been discussed, there is no solid framework ready yet. This not only is distressing startups but is building a lot of unwanted skepticism around crypto. 

Let’s start with the first one. 

No Clarity regarding GST 

Some big firms like Unicoin and Bitcoin are evading taxes, whereas a few other startups are struggling with allegations. Allegations on grounds, that have never been laid clear. 

More clear rules regarding taxes would set up a uniform standardized process. But a missing framework will just add up to disparity. [11] 

The gap in framework goes a long way in increasing overall “under the table” tax evasion. 

What does it take to get a standardized framework? 

A regulatory body, most importantly. 

Do they have one? 

No Certainty over regulatory body  

With a frequent row of RBI with the supreme court and now with the government as they plan to come up with their crypto, they are a difficult choice. 

SEBI then? 

SEBI has been in several rounds of talks with the government. Having proposed the invoke of Consumer Protection Act, they are also looking forward to entrusting a body to implementing all the listed regulations. [12]

Only when a body is chosen, can we formulate a solid framework and accordingly put BACC and other DEFI-related trade bonds. 

This is done and we are sorted? 

What about the commodity-currency war? 

After the government has declared that they will mine crypto and levy GST accordingly, we have been wild in our assumptions. What will crypto look like now? 

A commodity or currency? Which of them serves better? 

If it is a commodity, how will these crypto startups survive? Will they now change their domain name? – From ‘cryptocurrency’ to ‘crypto commodity’? 

Or will they change their offering – From easy transactions’ to only ‘long run investments’? 

With government-controlled mining, how would we manage the most important – “diversification of portfolio”? 

Will they not produce more than one kind of Bitcoin! 

What!!! How will we survive a bear market crash then??

Woah! I had my brain fall out. 

IS THERE ANY WAY FORWARD? 

See let us agree, that regulation is not all bad. I mean, we have examples. Look at the commodity-like treatment of crypto in Canada. Not only did it prohibit tax evasion but also attracted investors. [13]

HOW? 

The key lies in understanding the demography. Gauging our population’s interest and comfort may be the best indicator of “How we regulate crypto”. What can be the best example of this other than America, who’s still keeping it the non-regulatory way. [14]

But, that doesn’t mean they aren’t planning to do so. They are, but slowly. 

Currently, consumed with the appropriate use of ledger and bonds, they also look forward to stabilizing the fluctuations through a state surety bond. Converting a currency into a constant equivalent amount of bonds. [15]

But, that isn’t what dollars doing. Why cryptocurrency then? 

So, While evolving in the crypto landscape, are we losing the very purpose, Crypto was created for?