Cryptocurrencies, with a market capitalization of over $200 billion, can no longer be dismissed as just a fad. While still making up only a tiny fraction of overall global financial markets, they have matured from the ranks of fledgling startups to being leveraged by large enterprises for use cases ranging from global payments, asset-backed tokens for metals and commodities, fiat currency-equivalent digital coins, the Internet of Things, decentralized cloud storage and more. 

Earlier this year, JPMorgan Chase announced its United States dollar-equivalent JPM Coin for business-to-business payments; a consortium of large banks announced Fnality International, which aims to facilitate cross-border payments across five major currencies; and Facebook introduced Libra, targeting retail payments.

Several central banks are closely monitoring cryptocurrencies to both determine regulations to protect investors as well as explore their benefits in the context of central bank digital currencies. Let us look at both these aspects.

The need for regulation

Cryptocurrencies today lack the regulatory safeguards that financial institutions and markets have, such as third-party audits, financial reporting and disclosure, prevention of insider trading and a proper security infrastructure — all of which pose risks for the retail investor when unestablished.

While many crypto proponents argue that cryptocurrencies should not be regulated, as the technology is decentralized (some are designed to be censorship-resistant), many aspects such as exchanges, governance around issuance of new tokens, and marketing are highly centralized in nature, requiring standardized oversight to prevent and punish impropriety. If left unchecked, their volatility could pose a risk to the health and stability of the economy, especially for smaller developing countries.

Further, concerns over misuse of the technology to fund terrorism, trafficking and drugs makes it imperative for regulators to step in and enforce controls.

Central bank digital currencies

The potential of cryptocurrencies to make transactions and payments faster, cheaper and more secure has attracted several central banks to actively experiment with them. Both the Bank of England and the People’s Bank of China have already published statements that they will be issuing their own digital currency.

CBDCs could be a viable substitute to reduce the need for cash, which is the only other retail form of central bank money in circulation. Further, in a country such as India, where a majority of the population still remains unbanked, financial inclusion could emerge as one of the biggest benefits of CBDCs. The Committee on Payments and Market Infrastructures and the Markets Committee, comprising of representatives from over 15 central banks including the Reserve Bank of India, published a joint report classifying different types of CBDCs and commenting on their implications for monetary policy and considerations for financial stability. 

Reserve Bank of India and crypto

The RBI has had a two-pronged view on cryptocurrencies and has been very consistent in its messaging for several years now. On one hand, it has repeatedly warned the general public against investing in cryptocurrencies, citing concerns over consumer protection, market integrity and money laundering, among others. On the other hand, it has been quite welcoming toward blockchain technology in general, and has been researching CBDCs for its applicability to the Indian economy. The current need is a clear articulation of what constitutes a cryptocurrency or what classes of cryptocurrencies it considers to be problematic (such as those that resemble securities). This is a key problem that the cryptocurrency community needs to address by initiating a dialogue with regulators. More on that later.

Related: India’s Complex Relationship With Crypto

In December 2013, the RBI issued the first of several statements warning users of the risks of trading in digital currencies. In December 2017, India’s Ministry of Finance said in a statement that cryptocurrencies pose a heightened risk of an investment bubble of the type seen in ponzi schemes and that a sudden and prolonged crash would harm investors. In 2017, there were several reports that the RBI may be experimenting with its own digital currency, and this was later confirmed by the RBI itself in April 2018 when it announced that an interdepartmental group was analyzing the feasibility of a rupee-backed CBDC.

In a major setback to cryptocurrency enthusiasts, the RBI banned paying for cryptocurrencies using systems and portals of Indian banks in April 2018. This was arguably an easy way for the RBI to clamp down on cryptocurrency investment through already regulated systems while ring-fencing regulated entities and consumers from the risks of cryptocurrency investment.

Cryptocurrency in India, timeline

No to crypto, yes to blockchain

In April 2019, the RBI issued a draft framework for a regulatory sandbox inviting innovative fintech products and services, including blockchain and smart contract applications, and explicitly excluding any cryptocurrencies and initial coin offerings. 

Further to the RBI ban, an interministerial committee recommended a complete ban on private cryptocurrencies in July 2019 while accommodating rupee-backed CBDC and the use of blockchain for various use cases. This has laid a further dampener for Indian startups vying for the cryptocurrency market.

What can technologists do?

Technologists, product developers and regulators should collaborate to draft a regulatory policy for different classes of cryptocurrencies and arrive at a middle ground between a complete ban and having unregulated crypto markets. 

We first need standardized nomenclature to reason about the functions, use cases, benefits and risks of different cryptocurrency types. The Token Taxonomy Initiative by global leaders such as IBM is a positive step in this direction. It aims to create a platform-neutral framework for classifying tokens and coming up with specifications based on standardized terms and definitions. 

With the right controls and oversight, benign uses of cryptocurrency can help stimulate economic growth, foster financial inclusion, enable innovation to thrive, and simultaneously protect investors from misuse of this technology.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Praveen Jayachandran is a senior technical staff member, master inventor and manager of the Blockchain Platforms team at IBM Research, India. He co-teaches an online blockchain course which has had more than 45,000 registrations over three runs. He is a member of the IBM Academy of Technology, is an ACM Eminent Speaker and a senior member of IEEE.