The brush with crypto offers some lessons in regulation

The hubbub over crypto exchanges, especially the ease with which they have been able to formalize and propagate pieces of software code masquerading as financial assets, is once again drawing attention to entry standards in sensitive areas like financial services. The fact that crypto exchanges have been successful in signaling the legitimacy of their services and offering these tokens to a mostly uninformed public for over a year provides lessons on how government and industry regulators may need to act. before the game gets out of hand.

Technological innovation is generally one step ahead of regulatory frameworks, which are designed with current practices in mind. Problems arise when these innovations push the boundaries of accepted codes of social and ethical behavior. The Joint Parliamentary Committee (JPC) on a data protection bill that recently released its controversial report highlighted the proliferation of dubious “digital” lending apps on the Android platform: “At least 60 of these Loan apps available on Google Play Store were not registered or recognized by the Reserve Bank of India (RBI) as a Non-Bank Financial Corporation (NBFC). The Indian Google Play Store offers several such apps owned by operators or Chinese companies, including those named after other legitimate fintech companies. For example, “Udhaar Loan ‘sounds like’ Udhaar ‘, a specialized micro-loan fintech recognized by the Indian government.”

Blockchain technology, of which cryptos are a part, is an innovation that can facilitate transactions between various functions. But crypto exchanges in India have pushed the boundaries of this invention. They advertised aggressively on media platforms. For example, they’ve bombarded TV shows at recent cricket tournaments, using every trick in the book to sidestep responsible advertising standards, often delivering important warnings at high speed. These clauses were meant to communicate that cryptos are neither currencies nor strictly “assets”, and that these trading platforms are not really “exchanges”, that crypto values ​​are not determined by the usual dynamics governing others. income-generating assets, and that investing in cryptos was an extremely risky proposition. Some estimates show that more than 15 million Indians have invested in crypto, many of whom live in Tier II or III cities. Indian cricket fans, after all, make up a sizable population cohort in India. In the meantime, with ad overload spurring viewers’ interest, many fraudulent cryptocurrency issuers and exchanges have sprung up in an attempt to separate the gullible from their savings.

The government has now intervened, seized with the political perils of speculative investments which turn sour during an election period. Finance Minister Nirmala Sitharaman announced to Parliament that the government is drafting legislation to regulate cryptos. The government had been playing with such a project for some time, but a combination of factors – pressures from various sides and apprehensions from small savers losing money on the eve of the upcoming parliamentary elections in Uttar Pradesh, Punjab, Goa, Uttarakhand and Manipur in the first quarter of 2022 – appears to have prompted rapid executive intervention. Unfortunately, sector regulators, such as the Reserve Bank of India (RBI) and the Securities Exchange Board of India (Sebi), were unable to step in and act sooner as they are governed by specific laws that do not mention the cryptos as a category that needs regulation. Hopefully the legislation planned by the Center will now provide the enabling teeth.

But, going forward, this episode provides a valuable lesson in how these laws, perhaps, should include enabling clauses that allow financial sector regulators to step in whenever an intermediary tries to sell a service. financial or any new innovative financial service presents the risk of disrupting financial stability. . Relevant changes or additions to existing laws should strive not to be too open-ended or become too sector-specific, which would leave our regulators once again lagging behind in technological innovation.

Coincidentally, two important documents have recently been released that deal with entry standards into formal banking, both strengthening the hands of the RBI. The Niti Aayog think tank article on licensing digital banks recommends an evolutionary path for RBI-regulated digital banks at all stages: first a restricted license, then a regulatory sandbox offering some flexibility, and finally a “full-stack” digital banking license. Simultaneously, RBI weighed in on the recommendations made by its internal working group on ownership guidelines for Indian private sector banks: it accepted some of the suggestions and amended a few to make entry standards more stringent. , but maintained a sphinx’s silence on the entry of private sector companies into the banking sector.

JPC’s concerns over unregulated digital lending have also drawn attention to the report of an RBI-appointed committee on digital lending, as several fintech-based online lenders have mushroomed during the pandemic. . These lenders, some of whom have used unethical lending and collection methods, bristled at the idea of ​​being regulated. We can say that this is neither the first nor the last time that intruders will test the system. This in turn strengthens the case for principles-based regulations, rather than rules-based regulations, to allow flexibility and adaptability in a rapidly changing technological environment.

Rajrishi Singhal is a political consultant and journalist. His Twitter handle is @rajrishisinghal.

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