The increasing necessity for regulating cryptocurrencies

In the current scenario, India has chosen to take a wait-and-see approach towards cryptocurrency. While there is no outright ban, there is also no comprehensive regulatory framework in place. Cryptocurrency is treated as a virtual digital asset that can be bought and sold on crypto exchanges, with transactions being taxed at 30 percent.

However, due to the borderless nature of these transactions, there is a need for a global consensus to prevent regulatory arbitrage. Despite the initial vision of cryptocurrencies to operate outside of regulation, their stability and wider acceptance now rely on regulatory measures.

The emergence of meme coins in the cryptocurrency market by an active online community has introduced a level of volatility. These tokens, based on memes or video game characters, have seen significant growth recently. A community culture driven by shared sentiments contributes to their appeal, but also leads to volatility without any underlying value.

For instance, when Elon Musk temporarily changed his name to Kekius Maximus on a token traded on centralized crypto exchanges, its value skyrocketed by 900 percent. Market sentiments also caused a sudden surge in Dogecoin by almost 800 percent. In India, the popular meme coin Shiba Inu has emotional significance, with $1 billion worth of tokens being donated for Covid relief. However, the extreme fluctuations in meme coin values make them susceptible to risky pump-and-dump schemes. In contrast, stablecoins, backed by underlying assets, could pose a threat to sovereign currencies.

Despite the rapid growth of the cryptocurrency market, India’s investor base—estimated at nearly 20 million mainly tech-savvy users under the age of 35—makes it an appealing market. It is no surprise that crypto exchange Binance has returned to India after paying a fine imposed by the Financial Intelligence Unit.

The introduction of exchange-traded funds has also provided opportunities for investors without the need for direct involvement in crypto trading complexities. This has increased institutional involvement and bolstered the credibility of cryptocurrency as an asset class. However, it is crucial to enhance investor awareness about the associated risks. While regulatory surveillance is evident, the regulatory landscape is still evolving with ongoing learning.

Cryptocurrency is likely here to stay, but the average investor still lacks a complete understanding of its fundamentals. As the crypto landscape evolves with developers, hackers, new algorithms, and cybercriminals introducing continuous innovations, caution remains key.

Geetha Ravichandran

Former bureaucrat and author, most recently of The Spell of the Rain Tree

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