Cryptocurrency Regulation: The Uses and Functions Conundrum
When we talk about disruptive technology, crypto is one of the most discussed ones in recent times. Crypto is not a new technology, it has been there since the 90s, but in the last decade, it took a unique and creative path and attached to the financial system. The cryptocurrency is now a three trillion-dollar market, and the governments in different countries are struggling to get a hold of this unregulated market. The Indian government is also now thinking about regulating cryptocurrency, and it might come up with a framework in the upcoming session of parliament.[1] However, many questions are blowing in the wind about the nature and structure of regulation. The countries like the USA, UK, Japan, Malaysia, Italy for the last two or three years faced many difficulties in regulating cryptocurrency. And the primary problem is the confusion around the uses and functions of different cryptocurrencies operating in the market. Can cryptocurrencies be considered currency? Do they fall more into the category of securities, like stocks and bonds, or do they fall into the category of assets, like commodities? The regulators are confused.
In a democracy, a citizen has a right to privacy in more or less everything except anything to do with money. Citizens cannot hide their money or assets from the government, mainly because the whole system is directly or indirectly dependent on the financial system. That’s why the government, through various regulatory policies, highly regulates the financial system. That being the case, the government is trying to hold crypto, as it involves money. But first, they have to classify it as a specific financial instrument.
Is Cryptocurrency a Currency?
No, the governments are not in a mood to consider cryptocurrency like any other traditional currency. Mainly because the currency is an instrument that functions on the basis of promise, and there is always a central bank or, in a general sense, a state, who is issuing the currency. It is a centralized system, and the state is responsible for this. But cryptocurrencies like Bitcoin are decentralized; in most cases, we do not even know who first issued or invented that. So, in Japan, the term “virtual currency” was changed to “crypto-asset.” However, some smaller countries are thinking of adopting cryptocurrencies as the national currency. Recently, El Salvador became the first country to do that.[2]
Cryptocurrency as Securities?
The term “security” broadly refers to an investment instrument that has value and is tradable. According to the Howey Test, a financial instrument is a security if it meets a three-question test. 1. Is there an investment of money with the expectation of future profits? 2. Is there an investment of money in a common enterprise? 3. Do any profits come from the efforts of a promoter or third party?
Many of the cryptocurrencies answer all three questions positively. Cryptocurrencies can appear to be securities, like when they’re offered as stocks under “initial coin offerings.” Like Binance is a company that functions as a crypto trading platform. Another example is CoinBase, which is even listed in NASDAQ and trades in different countries.[3] Even a similar trading platform, CoinSwitch Kuber, launched in India recently. It is possible to compare the Bitcoin lending market to debt securities as well. This kind of platform comes into the purview of Securities and Exchange regulators like SEBI in India and SEC in the USA. But the existing regulatory framework is not capable of doing that.
Cryptocurrencies as Commodities?
Commodities are raw materials used as inputs in the production of other goods or services. Commodities can be bought and sold via the cash market. The emergence of crypto-currencies has also prompted many to say they are more like commodities than stores of value. Additionally, both markets have drawn speculators, who strive to profit by betting on big price swings rather than simply holding assets. Some cryptocurrency industry executives and enthusiasts have pushed for the market to be categorized as a commodity market, not security. Because commodity markets are generally regulated less stringently. But the regulators in many countries are not ready to consider crypto as a commodity. However, cryptocurrencies are designed to be decentralized so, like commodities, don’t produce a return from a common enterprise. The SEC Chairman has indicated that Bitcoin is not a security. So, the confusion is just getting bigger, like the value of cryptocurrency.[4]
In light of cryptocurrencies’ identity crisis over whether they are commodities or securities, it is crucial to understand how the space will grow and be regulated. However, the market has challenged the traditional categories of financial assets to some extent. In India, the government is most likely to consider it a security asset and be regulated by SEBI. At the same time, the RBI will issue its own cryptocurrency like a digital rupee in the future. It is not a time to comment on that. But it is evident that the primary aim of the central government in regulating cryptocurrencies is to implement KYC and AML framework in the market and leverage on tax on capital gains.
While there is no well-structured regulatory environment for cryptocurrency in the world as of now, cryptocurrency can be regulated by classifying them on a case-to-case basis. However, the regulation should be robust and updated with evolving technologies.
References
1. As govt prepares to table cryptocurrency bill, PM Modi’s remarks https://www.hindustantimes.com/india-news/as-govt-prepares-to-table-cryptocurrency-bill-pm-modi-s-remarks-101639206775669.html
2. El Salvador on Tuesday became the first country to use bitcoin as legal tender https://www.livemint.com/news/world/el-salvador-becomes-first-country-to-use-bitcoin-as-legal-tender-11631144769412.html
3. $COIN — it’s only the beginning
https://www.coinbase.com/listingday
4. SEC Chair Says Bitcoin Is Not A Security
