Don’t vacillate on a regulatory framework for crypto assets

There was no follow-up on it and India still has no statute or regulation that defines ‘crypto assets’ and the rules of running a crypto business in the country.

In the meantime, the world has moved rapidly towards mainstreaming crypto assets and crypto-currencies. The US Senate recently passed the GENIUS Act, legalizing privately issued dollar-backed stablecoins.

The market value of cryptocurrencies now exceeds $3.25 trillion. If all cryptocurrencies are taken as a single currency, it would be the world’s tenth largest by value.

Can India continue to ignore crypto assets? Why should India not go about building a sound statutory and regulatory ecosystem for them?

Also Read: Defence alert: Crypto is turning into a geopolitical weapon

The consequences of inaction: I have closely watched India’s crypto ecosystem over the past decade. Despite the absence of regulations, many crypto exchanges were set up.

Operating outside the law or in a grey zone without a legal framework, they flourished for some time by conducting an incoherent mix of legitimate and illegitimate transactions. Then crypto gains were brought under the tax net, trading almost collapsed and some frauds came to light.

GainBitcoin, a Ponzi-style multi-level marketing scheme that ran from 2015 to 2018, allegedly duped thousands of investors of an estimated ₹6,600 crore by promising fixed monthly returns of 10% on Bitcoin deposits, leaving scheme subscribers with worthless ‘market capitalization’ tokens.

The Central Bureau of Investigation has been investigating it and conducting raids.

Also Read: The triumph of crypto bros: Don’t just shrug and move on

WazirX, India’s largest crypto exchange, faced Enforcement Directorate searches in August 2022, which led to the global exchange Binance publicly distancing itself from WazirX despite an earlier ownership claim, causing widespread confusion.

In 2024, WazirX suffered a massive hack that resulted in the loss of 45% of the user assets (worth $230 million) held by it. There is no recourse in sight for the investors who lost their crypto assets. In a Singapore court, WazirX proposed a restructuring plan to distribute the remaining user assets.

The proceedings reveal a tale of compromises, hidden actors and regulatory violations, including operations conducted without a digital token service provider (DTSP) licence. They also exposed an offshore entity registered in Panama that held effective operational control.

Under the radar are numerous fly-by-night operators with various schemes aimed aggressively at retail investors in small cities. Some online exchanges are fake; others end in rug pulls, leaving asset buyers clueless once these platforms vanish.

To prevent such fraud, India needs smart, enforceable and investor-centric crypto regulations.

Also Read: Reduce friction: Let regulated stablecoins transform India’s remittance economy

Let crypto crises not go waste: All the crypto crises we have faced, involving substantial erosion in the wealth of crypto investors, have reinforced what I have long maintained: India’s approach to crypto assets has been piecemeal, passive and systemically unsustainable.

We must bring crypto-asset operations in India within the ambit of a defined and enforceable legal and regulatory framework that would help create a fair and transparent system of ownership and trading.

We should break the existing legal and regulatory logjam by separating trading, custody, lending, broking and technical services. This will help eliminate problems of groupthink and moral hazard (risky actions taken in the belief that someone else will bear the consequences).

We also have to provide legal recourse to investors if a platform fails or causes them other forms of suffering.

Also Read: Agentic payments are here: Why India needs a rupee-based stablecoin

This is a moment of reckoning: We can avoid the flawed models of early crypto adopters. We know how to build large-scale digital systems. We built Aadhaar for identity, the Unified Payments Interface for payments and the goods and services tax network for taxation.

We can surely build a reliable governance framework for digital assets and exchanges that operate as marketplaces for trades. These exchanges would ensure liquidity under the watch of independent custodians and a comprehensive regulatory mechanism.

We can lean on global experiences. The EU’s Markets in Crypto-Assets Regulation, for example, lays down clear responsibilities for operators and custodians. The GENIUS Act of the US focuses on regulating stablecoins.

Even Pakistan is currently establishing a crypto-regulatory authority. India, a country that pioneered innovative infrastructure for fintech and digital payments, must not remain on the sidelines. We need to create space for well-regulated digital assets to thrive.

Also Read: Rupee-backed stablecoins could complement RBI’s digital currency

India’s new crypto assets ecosystem should have four cornerstones:

First, clearly segregated functions for crypto exchanges, brokers, aggregators, custodians and other entities: These must be recognized as distinct players with defined roles.

Second, compulsory licensing: All entities in the ecosystem must operate within sound financial regulatory oversight.

Third, full and functional transparency: Institute regular audits, disclosure norms for operational structures and mechanisms for incident reporting.

Fourth, insistence on Indian jurisdiction: Asset ownership and contractual agreements must be legally enforceable under a specific Indian law.

In addition, we need strong penalties for fraud and false advertising to deter all actors with any mala fide intent.

If we build a strong statutory and regulatory ecosystem for crypto assets, Indians would be able to participate in this market with confidence in the safety of their investments.

Global investors will see India as a sound market. With clear obligations to meet, operators would focus on responsible innovation and safeguarding investor interests.

Delays are costly, but India still has a leadership opportunity here. The time to act is now.

The author is former finance secretary of India.