The Supreme Court of India has lifted the central bank's ban on trading virtual currencies. This order is clearly one of the biggest victories not only for the digital asset sector but also for India's rapidly growing fintech and technology industry.
This progressive decision paves the way for weighted and gradual regulation that will allow India to benefit from the rapid innovation of blockchain technology and digital resources.
Reasons for the ban
The Reserve Bank of India (RBI) said it considers cryptocurrency a significant risk to India's payment system and invest. India's experience with cryptocurrencies is not comparable to that of China or the United States.
Indeed, the real challenge for India was the application of the law. Indeed, considering the timing of Indian justice and the high likelihood that trials will be postponed for a long time until crimes lapse, it is understandable that regulators have attempted to eliminate consumer risks rather than manage them.
What is the way to go
The latest Supreme Court decision does not address the issue of law enforcement but opens the way for the creation of nuanced and well-designed rules. The Court will leave responsibility for regulating digital raw materials to the Securities and Exchange Board of India (SEBI). This is good news for three reasons.
First, the SEBI is the Indian equivalent of the US Securities and Exchange Commission and the Commodities Futures Trading Commission, which means that the industry has fewer regulatory fiefdoms to involve and fewer problems and arguments will fall into the regulatory vacuum. Second, the cryptocurrency industry will not have to worry about a patchwork of state-by-state laws, as is the case in the United States.
Third, SEBI has previous experience in dealing with market failure. This has two important implications. Indeed, the SEBI is likely to take a nuanced approach to treating traditional decentralized digital assets such as bitcoin and ethereum in a different way than fly-by-night coins.
In addition, having a single market regulator for both equity-type tokens (many ICOs) and commodity-type tokens (e.g. bitcoin and ethereum) means less opportunity for regulatory confusion or regulatory arbitrage.
All of this in turn means that when India finally defines a complete regulatory framework for digital assets, it will be a much clearer, more efficient and more transparent reality than the rampant confusion we face in the United States or Europe. Getting to that point will require sustained effort, but the prize will be worth it. The RBI, however, still has the power to limit banks from offering fiat services in relation to cryptocurrencies.
This ring-fencing of the fiat system from cryptocurrency risks is not unique to India and is essentially a BCBS (Basel Committee Recommendation to prudential regulators). European countries and the United Kingdom have recently started to unblock these fiat bridges with crypto exchanges on a case by case basis and India may take some time to follow this curve.
