Taming the beast

Much has been said about the urgent need to regulate platforms facilitating trading in private cryptocurrencies such as bitcoin and etherium. While unregulated trading on these platforms is putting investors’ money at risk, the bevy of other financial products -- such as fixed deposits, savings accounts, loans and credit cards backed by private cryptocurrencies – now being spawned by these platforms is compounding the problem. The unrestrained advertising of these products on mainstream media channels, such as during the ongoing T20 cricket world cup, is dangerous as naïve investors may be led to believe that these are secure products approved by the country’s regulators. Reserve Bank of India Governor Shaktikanta Das has explicitly voiced his concern over crypto trading on several occasions and this has been corroborated by the top three trading platforms in India blocking over 2 lakh accounts between April and September 2021 for illegal activities. Besides the risk of the misuse of private cryptocurrencies for money laundering and other activities, small investors are facing risk of financial loss through trading in these unregulated products.

That said, deciding on the manner in which the private cryptocurrencies have to be regulated is not easy; most countries are yet to take a firm stance in this regard. The more exigent issue is the sudden, unbridled proliferation of borrowing and lending activities by crypto platforms. Some of the popular platforms such as Coin DCX and Bitbns are offering fixed rates of interest if the private cryptocurrencies are held in the wallets for a certain period. The investors’ holding in the wallet is treated as a loan to the platform against which interest is paid. Platforms such as Vauld not only allow savings and fixed deposits, they also give loans and are moving towards credit cards backed by the investors’ cryptocurrency holdings.

The regulation of the crypto-related financial products is however likely to be as complicated as regulating crypto trading itself. If we break down the activities of the crypto industry, it will fall under multiple regulators. Regulation of crypto currency-based deposits should come under the purview of the Ministry of Corporate Affairs, RBI should be the natural regulator of lending and credit card activities while regulating trading in cryptos should be the Securities and Exchange Board of India’s job. That would be too many cooks in the kitchen and we know what that usually leads to. Given the fuzzy nature of the product, it is up to the Centre to fix the responsibility on the apt regulator for supervising and issuing guidelines for this segment. It could start by getting together the three regulators and brainstorming the issue. There is no time to be lost because crypto trading has caught the imagination of investors and the platforms are running an unregulated business. The Centre has to tame the animal before it runs wild.

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