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View: India can ring-fence itself against cryptocurrency risks by using a unique wallet for every citizen


Cryptocurrency activity in India has risen exponentially since March this year. Several policy risks that were so far manageable with low volumes have now come to the fore. No global precedent tackles the spectrum of risks India faces. Which is why India has to have a strong solution that can ring-fence Indian cryptocurrency activity and help GoI rein in risks.

Different regulatory approaches globally have focused on the regulation of centralised exchanges or intermediaries – virtual asset service providers (Vasps) – or by solving the issue of classification of cryptocurrencies. However, these approaches fail to tackle substantial decentralised activity through decentralised finance (DeFi) – where a centralised exchange can be substituted by a set of smart contracts – or tackle monetary concerns of financial stability and capital controls paramount for India.

Substantial crypto activity in India occurs outside of centralised exchanges, such as WazirX and CoinDCX. According to Chainalysis, close to $1.25 billion was transacted by Indians in 2021 alone through pure DeFi channels. In the Indian context, broad categories of risks posed by cryptocurrencies relate to financial stability, monetary policy, capital controls, illicit activities and investor protection.

The global experience with banning cryptos has proven to be ineffective. Due to rising decentralisation of activity, most bans can’t be effectively enforced as there are no intermediaries. Any bans on intermediaries actually incentivise people further to switch to decentralised channels. In February, the Central Bank of Nigeria prohibited banks from supporting any crypto transactions. It also ordered them to close accounts of Nigerians using cryptos. However, Nigerians have bypassed centralised exchanges and turned to peer-to-peer trading channels. They traded $2.4 billion in cryptos in May 2021 and Nigeria is considered the second-largest Bitcoin market, after the US.

What GoI needs is proper visibility into crypto activity, the ability to KYC (know your customer) and tackle anonymity, and the ability to have strong regulatory oversight of activity not just in crypto exchanges but the full spectrum of cryptocurrency, including DeFi and non-fungible tokens (NFTs). This has not yet been effectively managed by any country. However, India has some special tools at its disposal – Aadhaar, DigiLocker and IndiaStack. There is a simple way to tackle all these risks – building a KYC-ed crypto wallet, the India Wallet.


Security is the Key


While cryptos can be confounding to classify as securities, commodities, currency, etc, they are surprisingly uniform in their form factor. Every single cryptocurrency – whether a traded coin such as Bitcoin, an NFT, a utility token or a stablecoin, and whether it’s worth $1 or $50,000 – is just a pair of cryptographic keys. The public key is the visible key on the ledger (which serves as a username of sorts). The private key is the secret key known only to the user, which not only confers ownership of the asset but also enables the user to transact in any crypto network.

The entire gamut of operations conducted in crypto is, thus, enabled primarily by these two humble keys. Any regulatory solution that focuses on the management and custody of these keys will cover the entire gamut of activity in the crypto ecosystem, whether through centralised or decentralised players. It will work for cryptos in their present form but also for all future forms the asset class takes.

The India Wallet is proposed to be an Aadhaar-/DigiLocker-authenticated, de-duplicated, unique wallet for each Indian citizen that will be their ‘passport’ to connect to the crypto ecosystem. This can be new infrastructure or a modification by existing wallets such as MetaMask and Trust Wallet that are widely used by cryptocurrency users. All Indian activity can be mandated to funnel through the wallet or be deemed black money. Once the wallet is verified, citizens can connect to different exchanges to invest in crypto assets and can participate in all forms of crypto activities, including DeFi, NFT and Web 3.0, in the same manner they do now.

Wallets not authenticated through Aadhaar/DigiLocker will be treated as foreign wallets and transactions involving any foreign wallet may be marked as ‘cross-border’ transactions and can be scrutinised separately. Thus, India Wallet elegantly performs the task of KYC, segregating domestic from cross-border activity, and adding enforceable Indian jurisdiction to otherwise-uncontrolled crypto activity.

With these fundamentals in place, the India Wallet is then effective at managing a host of monetary policy and illicit activity risks. To manage any financial stability risks, a mere cap has to be placed on investments by individuals into cryptos. These can be defined in a policy and adjusted dynamically as per monetary conditions.

Similarly, to manage cross-border flows and exchange rate risk, the Liberalised Remittance Scheme (LRS) cap can be placed on cross-border flows through the wallet. It also serves as a platform on which to layer crypto forensics tools, which are highly advanced and effective at tracing dark web, terrorism financing, money laundering, hacks, scams and other illicit activity in crypto transactions. The US, Singapore, Australia and others have been using these tools effectively to counter risks from terrorism finance or money laundering.


Not a Cryptic Solution


By putting a ring-fence around Indian crypto users, the India Wallet also becomes a gateway for any crypto protocol or business trying to interact with Indian users. With such an infrastructure in place, centralised exchanges, NFT marketplaces and other services will have to enable an integration with the India Wallet, which then becomes a checkpoint for regulators to guard Indians against scams and other risky projects. Any frameworks built to regulate marketplace actors can now be enforced by the wallet infrastructure.

An approach like this builds upon India’s leadership in regulating fintech with a combination of technology and regulation. It would also make India a role model for many countries looking to manage monetary risks with cryptocurrency. This solution not only strongly reins in risk but also promotes innovation by being ‘light touch’. Even though India is one of the last major countries to bring in its framework, such a leapfrog solution could catapult it to global leadership in effective crypto regulation.

(This piece references Policy 4.0.’s detailed report on the India Wallet which can be accessed on their website)



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