The cryptocurrency market has been witnessing a bear run in recent times, but this is no exception to this space that has bears and bulls outrunning each other from time to time. While China has banned cryptocurrencies, most democracies around the world are still looking to have a clear regulatory mechanism in place rather than banning the digital assets.

India, too, seems to have taken a regulatory approach rather than banning, although the manner of taxation imposed on cryptocurrencies needs relooking to move in the direction of regulation rather than making transactions unviable. The crypto tax, TDS, off-set losses, and inaccessibility to banking systems has discouraged the industry so far in India. Subsequently, the sector has also seen chaos with regard to regulation and legitimacy.

Yet, many companies in the crypto space continue to place their optimism with the Indian market in this space, while new users continue to grow in 2022 compared to the previous year. The crypto-tech market in India could potentially be worth of $2.3 billion globally by 2026, and can create 800,000 jobs, an economic value-add of $184 billion by 2030 through investments and cost-savings, according to Nasscom’s ‘Crypto Industry in India 2021’ report.

There is a global consensus that crypto must be regulated, and a similar view was reiterated recently by the Union finance minister Nirmala Sitharaman while stating that RBI is of the view that cryptocurrencies should be prohibited. But effective legislation on this matter is possible only through international collaboration. The same had been echoed by Indiatech.org in its whitepaper last year.

Prime minister Narendra Modi, on different occasions, including the Sydney Dialogue and the WEF summit, has held that “it is important that all democratic nations work together to ensure that cryptocurrency doesn’t end up in the wrong hands.” Moreover, countries, companies, and international organisations have already begun to find concrete means of oversight of the space, both legal and technological. It is not enough for the regulator to constantly highlight the dangers of cryptocurrencies without taking appropriate action to make the market a safer place for both consumers and businesses to operate. It is likely that most major jurisdictions in the world will not ban or prohibit cryptocurrencies; rather, they are positioning themselves to grow the industry. For instance, the proposed EU Markets in Crypto Assets Regulation expressly seeks to balance innovation and regulatory risks.

A paper published by the IMF makes concrete recommendations on the steps countries should take to “preserve the effectiveness” of capital controls against crypto-related challenges. Notably, several other jurisdictions have explicitly acknowledged the several benefits of crypto and mooted implementing regulations that do not stifle innovation in the space. The European Commission’s Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, for instance, adopted a balanced approach. The United States White House Executive Order on Ensuring Responsible Development of Digital Assets also noted several benefits of the responsible development of the crypto ecosystem. The benefits of developments in the crypto space have also been recognised by the United Kingdom’s Crypto-assets Taskforce.

Recently, RBI announced its decision to allow trade settlements between India and other countries in rupees. While the move is seen to benefit trading primarily with Russia, it is also likely to help check dollar outflow and slow rupee depreciation. This has a long-term goal to strengthen the rupee in forex trade and also internationalise the currency.

While RBI’s concerns are valid, especially around the dollarisation part, this is an area wherein the government, regulator, and industry can jointly find a way out. The view that the majority of cryptocurrencies are dollar-denominated rises from the perception that usually the rupee is used to buy dollars, which, in turn, is used to procure the stablecoin Tether (USDT), which aids the purchase of cryptocurrencies.

However, if the rupee trade settlements route is explored and expanded to cryptocurrency trading operations, the dollarisation concerns can subside. Many countries, including India, China, and the US, are exploring the option of having a Central Bank Digital Currency (CBDC). An important success factor of a CBDC is the cooperation between the public and private sectors, with the private sector participating in developing, testing, and deploying a CBDC. One of the most organic use-cases for the CBDC can come be making it a part of the stablecoin layer for exchanges. In the event the billions-of-dollars worth of crypto-trading volumes can potentially take place on top of the Indian CBDC in a regulated and compliant manner, the large-scale retail adoption of CBDC will receive a big boost.

With the emergence of Web3, the Metaverse, and the large-scale adoption of cryptocurrency platforms like Ethereum and Polygon by global brands, more Web3 interactions are expected to take place using the native cryptocurrency tokens of these platforms, and CBDCs can become the gateway for Indians into Web3.

The lack of regulatory clarity, an onerous taxation route, and the scrutiny on the cryptocurrency sector in the recent past has pushed more than 300 startups in the space to move out of India. The government should provide a conducive environment to cryptocurrency startups, by opening up communication channels to jointly address all the concerns, including safeguarding users’ interests and preventing money laundering. Having such a mechanism in place will help pave the way for regulating the cryptocurrency industry in India, checking the flight of capital to other countries, and strengthening the rupee instead of encouraging dollarisation.