Frequently Asked Questions – Crypto Assets

 

1. What is a digital asset?

A digital asset is anything that internet users can share electronically. Examples include a digital photograph and Bitcoin.

 

2. What crypto asset?

A crypto asset is a digital asset that relies on decentralised ledger technologies such as blockchain to secure, confirm, and record transactions. A decentralised ledger is a form of record-keeping that anyone can access from multiple locations instead of a centralised ledger that a third party maintains in one location. A crypto asset has several functions and can act as a unit of account, a medium of exchange, a store of value or be a digital representation of any physical asset.

 

3. What is Blockchain Technology?

Blockchains are decentralised ledger technologies that enable transaction and settlement between two parties, without the involvement of an intermediary. Blockchains are a combination of:

  1. security technologies that (i) enable the creation of verifiable accounts, (ii) secure information, and (iii) create a transaction record that is hard to falsify.

  2. a network with many participants unknown to each other so that they cannot conspire to falsify the transaction record. The network also ensures that there are multiple copies of the transaction record so that if one gets deleted all information is not lost.

  3. an automated enforcement mechanism, like self-enforcing rules, which ensures that all network participants work together to maintain the integrity of the transaction record.

 

4. What is the link between blockchain technology and crypto assets?

Without crypto assets, blockchain is an empty register that cannot record transactions. Each entry on this database corresponds to a crypto asset.

 

5. What are the different types of crypto assets?

There are two broad categories of crypto assets. First are those like Bitcoin and Ethereum which are native to their own blockchain network and are known as coins. Coin holders can transact and build applications atop blockchain networks. For instance, to create an application on the Ethereum blockchain, a user will have to pay a small fraction of Ethereum as transaction costs. The second category includes crypto assets such as stable coins and digital art non-fungible tokens (NFT) are known as tokens. Tokens are crypto assets that do not have their own native blockchain network. In other words, they are not integral to the functioning of a network. Rather, these tokens are applications that are built atop the blockchain network – just like the messaging service WhatsApp that works on top of telecom networks.

 

6. What is unique about crypto assets?

Crypto assets resolve the double-spending problem with unencrypted digital assets such as digital money, where a user is able to duplicate the digital asset and complete multiple transactions.  It is easy to falsify transactions or records related to digital money because it is replicable, and it is impossible to chart its origins. With crypto-assets, however, the existence of a distributed ledger that is updated and verified through network-wide consensus, this problem doesn’t exist. The provenance of each crypto asset can be tracked by all. Thus, each crypto asset has the attributes of physical property with an unbreakable chain of title. It is possessable, scarce, and has a clear record of prior ownership. Thus, crypto-assets like Bitcoin can be thought of as a digital commodity – just like gold.

7. Why are people buying crypto assets?

It is markets that drive the value of crypto assets. However, rather than a commodity, investors in crypto assets are putting a value on technology. Illustratively, an assessment of crypto assets shows that native crypto assets, such as Bitcoin and Ethereum are much higher in value than tokens built on top of these blockchains. 

 

8. How are crypto assets traded?

Private computers or networks mine crypto assets. In other words, they use computing power to facilitate the generation of these assets. Crypto asset owners may hold them, sell them, or transact using them. A buyer could purchase an asset directly from the miner, through someone who holds crypto assets, or via an exchange. If someone wants to buy the Ethereum crypto asset, they may either buy it from its website or mobile application or from an Indian Crypto Exchange.

In India, potential buyers first register on a crypto exchange and complete a KYC process. Once that is completed, the exchange creates a wallet for the buyer and he/she can transfer currency into the wallet. The buyer may then choose to invest this money for crypto assets that the exchange makes available on its platform. He/she may then hold, sell, or transact using the crypto asset, although there are few sellers in India who accept crypto as payment.

 

9. Why is there discussion around the regulation of crypto assets?

Like any other financial asset, crypto assets to pose certain policy concerns which regulation should address. Broadly, these are about investor protection, taxation, money laundering, and foreign exchange management. However, none of the policy concerns raised by crypto assets are new. They can be resolved through solutions in current financial frameworks.

The Lok Sabha Bulletin of matters that it will take up listed the “The  Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” for discussion during the ongoing Winter Session of the Parliament. The blurb next to the item suggested that the government considered a ban on all private cryptocurrencies. However, Nirmala Sitharaman, the Union Finance Minister, stated later that this was older legislation and the government is still debating the subject. Latest newspaper reports suggest that SEBI would regulate cryptocurrencies instead of the government imposing a blanket ban on them.

Reportedly, NDTV has seen a copy of a draft note on the Cryptocurrency Bill circulated among Cabinet Ministers. Its highlights include:

  • India will not ban crypto assets but regulate them.

  • Crypto assets would be defined as assets and not currency.

  • SEBI will regulate crypto assets for tax monitoring and compliance purposes, and subject them to the extant framework followed by security exchanges.

  • The Union government should amend the Prevention of Money Laundering Act, 2002 to include crypto assets within its ambit.

However, the latest media reports suggest that Parliament will not table the legislation during this Winter session.

 

10. Why are crypto-assets important for India?

India is a leader in the crypto-asset industry. It has over 15 million retail investors and 300 crypto startups out of which three are unicorns i.e., they are valued at over one billion US dollars. With crypto-assets, India has an opportunity to be a world leader in an important emerging technology sector. Thus, any government regulation must seek to preserve innovation in crypto asset markets, while accounting for the policy concerns we have cited in question 10 above.

The Case for Regulating the Use of Cryptocurrency in India

The draft Cryptocurrency and Regulation of Official Digital Currency Bill 2021, which is likely to be introduced in the Budget session of Parliament, will ban all private cryptocurrencies and introduce a framework to develop an official digital currency in India. The ban will prohibit people from using, buying or selling, cryptocurrency; bar companies to provide cryptocurrency-related services to consumers or investors which includes registering, trading, settling, clearing or other services; and any other use of cryptocurrencies.

One Coin
Social Finance: Leveraging Crypto Assets in India

The paper discusses the relationship between social finance and crypto assets. It briefly mentions the growth of social finance and challenges faced by it in the world. Further, it discusses the emerging trends in social finance with a special focus on crypto assets. The challenges on crypto adoption in India, the regulatory and taxation framework is very well explained. Keeping in mind that no technology is inherently good or bad and that it can be used to create impact on society, the paper discusses the global best practices in enabling crypto use for social finance. 

Growing Plant
Crypto assets - What are they and how should they be classified in India? 

Crypto-assets are types of digital assets that rely on a combination of cryptography, peer-to-peer networks, and algorithms to process, verify, settle, and record transactions without relying on a trusted third-party for validation. There are over 12,000 different types of crypto-assets, each providing unique services and functionalities. Despite this abundance, there is limited understanding about what these assets are. Moreover, these assets represent a nascent technology that is rapidly evolving. As such, defining and classifying them for the purpose of regulation presents a continuous challenge. This paper attempts to resolve these ambiguities by explaining what crypto-assets are and highlighting the aspects of approaches taken by different institutions and jurisdictions to define and classify them. Further, it suggests a way to classify crypto-assets in India to enhance the ability of authorities to effectively regulate them. 

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Decentralized Exchanges: Regulatory Perspectives for India

Decentralized exchanges (DEXs) have emerged as an important component of a broader crypto-business segment known as decentralized finance (DeFi) – an ecosystem where financial activities are carried out through smart contracts rather than intermediaries. The regulation of decentralized exchanges is necessary from the standpoint of consumer welfare as well as anti-money laundering concerns. Decentralized exchanges are designed to offer peer-to-peer trading services, where a smart contract rather than an entity facilitates transactions. Therefore, Understanding the regulation around DeFi services is important for policymakers globally. This paper outlines possible approaches regulators in India may take to govern decentralized exchanges effectively. 

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