For most of the last decade, India’s stance on cryptocurrencies has been uncertain, to say the least. The current soft ban is hurting the country’s potential every day, but recent reports suggest the country is having second thoughts.

In March this year, a notification published by the Ministry of Corporate Affairs stated that companies dealing in cryptocurrencies would have to disclose their holdings to the government in financial statements. Crypto-holding companies will also have to disclose total profits and losses, as well as any deposits or advances received from other traders and investors.

Just two weeks earlier, there was a report that cryptocurrencies were expected to be criminalized under an upcoming legislative bill, including their trading, mining, issuance and possession. So, why the sudden change of heart? And does anyone really know what’s going on?

Uncertain on being uncertain

The MCA notification couldn’t have come at a more ambiguous time for cryptocurrencies in India. In the Reuters report, India’s finance minister Nirmala Sitharaman stated that the government was taking a balanced approach to regulation and not shutting down all options. The waning and waxing of stances from different government bodies and organizations beg more focus, but it still might not be too late.

India’s crypto industry leaders have been long heralding the case for crypto’s regulation and pushing harshly against a ban that could cripple thousands of businesses. The country’s demand for digital assets has never been higher, with a study that goes back to as far as 2018 conducted by Quartz already linking one in every 10 Bitcoin (BTC) purchases to the Indian subcontinent. It is safe to presume that this level of interest and demand has only increased since.

The MCA’s latest notification could be a sign of the country finally embracing cryptocurrencies and has been well received by most of the prominent blockchain-related companies in India, with most expecting regulation to follow instead of an outright ban. In fact, a recent report on currency and finance from the Reserve Bank of India recognizes the potential of a central bank digital currency for rising demand in emerging markets and improving monetary policy.

However, it also labeled the concept “not an unmixed blessing” that risked making many intermediaries of the banking system redundant. “CBDCs are important, as they will take India to the front line of the currency wars, which will take place over the next two to three years,” said Sidharth Sogani, CEO of blockchain research and intelligence firm Crebaco Global, in a conversation with Cointelegraph. However, he also added that there are many challenges involving the Indian economic structure and how it doesn’t allow for the free movement and conversion of the currency.

“We have been getting very positive signals from the government as far as crypto regulation is concerned,” said Shivam Thakral, CEO of BuyUcoin — an Indian cryptocurrency exchange — adding:

“We remain optimistic that the government will provide a healthy regulatory environment to enable the growth of the crypto industry in India.”

His sentiments were shared by Sumit Gupta, CEO of CoinDCX — one of the largest crypto exchanges in the country — “There is a gradual shift in narrative from what we saw in 2018 to present day.” He added further: “I am confident that the government will take heed of the stakeholders in the crypto community before deciding any course of action.”

Cautious optimism

Cryptocurrencies seemingly pose risks to the national economy in all kinds of ways, and without strict regulation, the unregulated digital assets economy could indirectly subject Indian markets to manipulation. Unlike traditional securities, cryptocurrencies aren’t backed by tangible assets, and this opens the asset class up to uncharted price territory and discovery, which raises systemic stability concerns, consumer protection implications and heightened risk of information asymmetry.

The Financial Action Task Force, an inter-governmental financial regulator that combats money laundering and terrorist financing efforts, has recently highlighted how the anonymity offered by some cryptocurrencies could intensify money laundering risks. However, it also provided guidance on how to mitigate those risks through a combined approach of untested and age-old methods.

A well-thought-out regulatory framework could help promote transparency and the democratization of market participants while also protecting markets against players with malicious intent. They say prevention is always better than a cure, and preemptive regulation can set the standard for what blockchain companies need to comply with to best support the country as a whole.

In fact, a regulated crypto infrastructure could help the Indian economy grow unlike anything else. According to Gupta, “given the sheer size of the crypto market in India, with more than 75 lakh [7.5 million] investors and over 340 crypto startups, crypto regulation will have a significant positive impact on India’s economy.”

He also said that with smart and sensible regulation, blockchain technology will create more job opportunities for people and usher in an era of transparency for our financial system. Additionally, the large trade volumes on exchanges could become a significant source of tax revenue for the government, offer exponential growth, and create more wealth for the blockchain ecosystem in India.

Responsible regulation

Despite the risks that crypto poses, an outright ban would be counter-productive in the long run. Both research and history show that banning something tends to take those businesses off the grid, and this loosening of control could bring unintended consequences. In a world where internationally recognized currency can be sent across borders as easily as an email, it’s also near-impossible to ban completely.

Without a unified effort to regulate cross-border flows on blockchain networks, no nation will be able to protect its own economic jurisdictions, which could result in widespread international arbitrage. Though there are talks of a CBDC, issuing a state-backed cryptocurrency in India while restricting the purchase and sale of other digital assets could also be detrimental as a whole.

The International Monetary Fund, a global financial institution created to foster international monetary cooperation, has already indicated that both private and public money can exist while complementing each other. However, the IMF has also stated that we should value innovation and diversity without compromising stability and security.

Objectives related to public policy can all be addressed through macro and micro-level regulation of digital assets. At the moment, the biggest bottleneck appears to be information. Government officials are far from experts on financial systems, decentralized networks or cryptography, and educating state representatives could go a long way.

Conducting more research in controlled environments could allow policymakers to examine how cryptocurrencies are used and help them to create a more robust framework for businesses in the country, as Sogani added:

“India’s potential crypto market size is over $15 billion. Regulation in the right direction will allow people to freely invest and trade crypto, creating over 25,000 job opportunities. Everyone wants to operate in a regulated environment; no one wants unnecessary litigation.”

Whether the current shift in stance will stay is yet to be determined, blockchain-based companies are being largely cooperative. With time, India could still potentially take up cryptocurrency regulation and help build the financial architecture of the future with the rest of the world.