- Opinions
- 4 min read
Given the regulatory ambiguity and the lack of regulators’ confidence in crypto, it’s important for the crypto industry to proactively regulate itself through a self-regulatory organisation (SRO), without waiting for government intervention.
- Arjun Goswami & Aditya Rathore ,
- ETLegalWorld
- Updated On Feb 21, 2024 at 08:46 PM IST
Read by: 100 Industry Professionals
Read by 100 Industry Professionals
We often fear what we don’t understand, and we don’t yet truly understand crypto. The fear of risks has resulted in a tumultuous regulatory journey for crypto assets in India. Regulators have long regarded the industry with suspicion for reasons that include its use in illicit financing activities, macroeconomic stability risks, consumer protection, extreme volatility, and its popular branding as crypto-currencies. RBI continues to caution users against cryptocurrencies even after the Supreme Court struck down the prohibition on regulated entities from dealing in cryptocurrencies imposed in 2018. Although, the government has been talking about a global framework on crypto regulation for the last couple of years, it has refrained from regulating crypto by itself. The crypto industry has also been advocating for regulation as well as self-regulation of crypto assets. However, there is no clarity on how crypto would eventually be dealt with.
Given the regulatory ambiguity and the lack of regulators’ confidence in crypto, it’s important for the crypto industry to proactively regulate itself through a self-regulatory organisation (SRO), without waiting for government intervention. An SRO initiative, even without regulatory backing, would help the industry to generate public confidence and demonstrate its intent to develop a responsible and safe crypto ecosystem that is sensitive to consumer protection as well as macroeconomic risks and illicit financing activities.
The idea of an SRO for the crypto industry is neither novel nor revolutionary. Crypto industries have formed SROs in regulatory vacuum all around the world. For instance, CryptoUK in the UK and the Virtual Commodities Association in the US were formed in 2018. There have been similar attempts in India too. For instance the Blockchain and Crypto Assets Council (BACC) (formed in 2017), had adopted a code of conduct for its members, but the council was dismantled in 2022. However, BACC was not truly an SRO and was promoted by the Internet and Mobile Association of India (IAMAI) as an industry body to represent crypto exchanges and start-ups. IAMAI decided to shut it down considering RBI’s adverse views on crypto and the potential peripheral impact on its other activities. Similarly BharatWeb3 Association, another industry body that is currently active, has published consumer protection guidelines for its members. However, these guidelines lack teeth and are inadequate to win the regulators’ confidence.
What may be important now is to anticipate the key areas of concern for the regulators, design transparent and publicly available standards of conduct addressing these concerns and make them enforceable. It is understandable that self-regulation without regulatory backing may not have effective enforcement tools. However, a simple public reprimand to a defaulting player would go a long way in demonstrating the industry’s intent. The effectiveness of such an unrecognised SRO in risk mitigation will continue to be debated, but it will demonstrate that there are responsible players who can come together and commit to high standards of conduct for the greater good.
Advt
To our mind, the question of how to regulate is not as difficult for the regulators as the question of whether to regulate crypto, since official regulations would grant legitimacy to the industry and make investments in crypto appear safer than they actually are. So, until the policymakers are confident enough to regulate crypto and to formally recognise an SRO, the industry must collectively ensure that there are no FTX or Celsius like episodes in India, which can provide justifications to impose blanket restrictions. There will always be bad actors who take undue advantage of the market, and the industry should be able to weed out such bad actors through an SRO.
Crypto industry has the necessary expertise and the ability to self-regulate, and there are enough examples now globally, which the industry may emulate while modelling self-regulatory codes e.g., Markets in Crypto Asset Regulations (MiCA) in Europe, or the Japan Virtual Currency Exchange Association (JVCEA) acting as an SRO in Japan. The recent draft SRO framework for FinTechs released by the RBI can also provide guidance on structuring an SRO for crypto.
In our view, an effective SRO is an existential choice for the crypto industry. It does not rule out the need of a regulatory framework, or the need to formally recognise such an SRO. However, it would strengthen the industry by separating the good actors from the bad ones, improving public confidence, and shutting down the sceptics who assume that the crypto industry seeks to remain unregulated or lightly regulated only to ride the speculative frenzy, carry out illicit transactions, or to make fraudulent gains. It would provide the necessary regulatory comfort to let the industry flourish and bide its time while the policymakers make up their mind on crypto regulation.
- By Arjun Goswami & Aditya Rathore ,
- ETLegalWorld
- Published On Feb 21, 2024 at 08:31 PM IST
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- cryptocurrency
- sro
- india
- virtual commodities association
- supreme court
- rbi
- Aditya Rathore
- Arjun Goswami
- Cyril Amrchand Mangaldas
- Opinions
