Regulation of ‘digital assets’ has been a hot potato for several years. The challenge has been the pace of technological evolution in this space — before one use-case can be assessed by regulators, other use-cases emerge, posing fundamental questions for policymakers — that is, how to define the space, create ‘triggers’ to regulate conduct, and whether to licence and regulate.

Challenge with any digital law globally has been in containing technology through legal concepts like definitions. Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, which proposed to ban cryptocurrencies in the country, similarly provided for an expansive definition of ‘cryptocurrencies’, raised many questions, and a similar question may arise as and when the text of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is made public.

Digitisation is expected to transform business and the global economy, especially with the lifestyle changes ushered in by the pandemic — everyone realised that life can go on even without brick and mortar, till one has internet, a smartphone or tablet, and digital payment options. Digital assets, be in cryptocurrencies, non-fungible tokens (NFTs), gaming, metaverse, loyalty points, wallets, etc., have undergone a sea change in the last few years, with many new use-cases.

This complicates regulation where a detailed cost-benefit and deeper analysis of impact does not precede law and policy-making. There is global regulatory ‘peer pressure’ — to see what other jurisdictions do in response to digital assets, and the current debate around Central Bank Digital Currencies (CBDCs) being a case in point. 

Unfortunately, history so far teaches that there is no defined way to regulate digital assets, unlike other emerging areas like data protection, platform liability, e-cigarettes, digital taxation, etc., all being new use-cases requiring a policy response within a short timeframe. Policymakers would have to be more principle based, less prescriptive, keeping customer protection and resultant systemic risks as the north star — be it price fluctuations and loss of investments, cyber incidents and hacks, potential for market manipulation or grievance redressal.

President Biden’s March 9 Executive Order has been hailed as a positive step in this direction, acknowledging that technological advances and rapid growth of digital assets necessitate an evaluation and alignment of the US Government approach to digital assets, and prescribes multiple reports and studies by cross-functional US agencies.

It recognises the threats of global financial stability, illicit finance and national security risks, and consumer, investor and business interests involved with digital assets. Similar developments in Brazil and the UK since reinforce the global move towards holistically understanding digital assets, recognising that they may be here to stay, and give a signal to others to assess first, rather ‘shoot first, ask questions later’.

Clear lessons

The lessons from these approaches are clear. Regulating digital assets is not the exclusive domain of a single regulator. The experience so far has shown that a policy response to digital assets will pose a never before seen challenge, requiring understanding the risks first, before taking a licensing or regulatory approach, which are readily available options for law makers.

Regulators would have to visualise the far-reaching use of technology in the regulated services to first understand use-cases and attendant risks, and then regulate the digital revolution underway. Conventional means to rule-making may defy regulation of digital assets and get constrained by regulatory silos, turfs, domain and legal limitations. 

CBDCs can be the first (and not the only) natural response to regulated digital assets. Anything that becomes an exclusive domain of the sovereign will stifle innovation. The ongoing digital assets revolution is beyond just cryptocurrencies as an investment or asset class, and the underlying technology and its evolution deserve to be recognised for legitimate use.

India is on the cusp — never before has a topic seen such interest, on this sustained a basis. The policy-making must follow a detailed study of the risks, opportunities and challenges posed by the current digital assets revolution. This is India’s moment to show leadership in regulation and promote innovation.

The writers are Partners, Cyril Amarchand Mangaldas. Views are personal

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