The Finance Bill 2022 was the first legislation in India to define crypto assets. “Virtual digital assets,” he said, are – I’m condensing here – a digital representation of exchanged value with the promise or representation of having inherent value, or functioning as a store of value or a unit of account.
Yet there is a predisposition among some to label the crypto ecosystem as the Wild West – a lawless kingdom that serves society no good. This is an argument very far from the truth.
To decompress, let’s start with Texas. The state of Texas has one of the strictest laws against betting and gambling in the United States. The laws are so broad that even fantasy sports can be construed as gambling. This tells me that the land historically called the Wild West can be very strict. Relevance here? Texas also has some of the most progressive crypto laws.
To borrow a cliché, even the Wild West has clearly differentiated cryptos from gambling.
The Texas Virtual Currency Bill grants legal status to cryptos, subjects service providers to existing state business laws, and grants rights to investors. For example, under the law, if a person owns 0.33 bitcoin, then they have rights to 33% of a single bitcoin.
Since then, state-chartered banks in Texas have been permitted to provide crypto asset custodial services to their customers, provided the bank has adequate protocols in place to manage risk.
Regulators elsewhere have also recognized cryptos as an asset class, its underlying value being the utility and adoption of the blockchain network. It’s no more speculative than, say, investing in a startup.
This explains the growing institutional investments in cryptos. From GrayScale Investments to JP Morgan, investment firms are increasingly offering their clients access to bespoke crypto funds – GrayScale alone holds over $40 billion in crypto assets. Consulting firm PwC estimates that in 2020 the share of crypto hedge funds with at least $20 million in assets has increased from 35% to 46%.
Betting, on the other hand, is simply a game of probability – a bet on one of many possible outcomes. What is the probability that Horse A wins Race 1, Horse B finishes second in Race 2 and Horse 3 wins Race 3? Even professional bettors are bound to fate, even though they deploy mathematical modeling to their aid.
It is not the same as investments. Are there any risks in investing in stocks? Yes, but informed decisions and transparency can mitigate this. But does that make betting on stock trading? No.
In fact, stock markets used to be compared to betting back when our knowledge of the subject was limited. Satta Bazaar, as it used to be called. The perception of stock exchanges as betting circles was so widespread that the AD Gorwala committee in 1951 had to go into great detail to distinguish measured speculation from gambling. Today, post-liberalization, it is advisable to invest in shares.
Cryptos are in the same phase of adoption today as stocks were then; and we are once again mistakenly comparing a new asset class to bets.
Cryptos are to the blockchain what stocks are to public companies. The United States Securities and Exchange Commission considers many crypto tokens to be securities, with the notable exception of Bitcoin.
Some crypto assets are considered commodities. Bitcoin, in some jurisdictions, is defined as a private currency, and in most others as a simple asset.
That is, fundamentally, crypto assets are distinct from purely speculative betting. Then there is the question of the use cases for cryptos, from the immersive Internet experience of the Metaverse to the shared and open Internet of Web3.
Yet, the tax provisions that India has set for crypto assets are comparable to betting. A misreading of market volatility may explain this. But the volatility is a function of the phase and the rapidly growing adoption rate. It’s not by design. The Indian crypto market is estimated to have grown by 641% in 2021, according to Chainalysis, a blockchain analytics firm. As the ecosystem develops and matures, the volatility would decrease.
The immediate need is a regulatory framework that protects investors and standardizes compliance and transparency standards for service providers. Considerable effort must also be made to educate investors.
To borrow from the Gorwala Committee report, the essence of regulation is to control speculation, and the crux of controlling speculation is its confinement to the right sphere, to the right people and to the right type and volume of transactions.
This is the path taken by the West and the Far West. Hopefully India will also follow with a comprehensive and conducive regulatory framework.
(The author is co-founder and CEO, CoinSwitch)