Decoding Digital Dollars: A Cross – Continental Analysis of Cryptocurrency’s and Financial Systems in India and The United States of America (USA)
Vansh Lalwani
5th BBA.LLB (Hons.), Christ (Deemed to be University), Delhi-NCR
Abstract
Cryptocurrency has emerged as a significant development of the 21st century, impacting people’s lives due to its unregulated nature and alluring prospects. It represents a rich source of dynamism driven by frequent technological advancements. Cryptocurrencies, secured by cryptographic methods, are digital currencies that prevent fraudulent activities through distributed ledgers (blockchains) overseen by a decentralized network of computers. Achieving a balance in fostering innovation incentives is crucial, given cryptocurrency’s rapid integration into the mainstream financial sector, thereby accelerating entrepreneurial funding. This necessitates the establishment of comprehensive regulations in the existing crypto-asset markets. While businesses have eagerly ventured into the cryptocurrency domain, foreseeing its future prosperity, the government has not yet made definitive moves to delve into the realm of cryptocurrencies. They have refrained from taking extensive measures to govern these emerging trends but are closely monitoring the developments. This article analyses cryptocurrency regulations in India and the United States, highlighting their diverse approaches. India leans towards stringent regulations, while the USA takes a more measured stance, engaging federal agencies without extensive rulemaking. The analysis delves into the impacts on these regions’ innovation, global competitiveness, and risk management. The article also provides recommendations for India to establish effective regulations that harness cryptocurrency’s potential for economic growth. It underscores the urgency for the US to collaborate and streamline regulations to maintain a competitive edge in the dynamic cryptocurrency industry.
Keywords: Cryptocurrency Regulation, India, USA, Financial Institutions.
Introduction
Cryptocurrencies, the digital evolution of money, have revolutionized financial transactions by offering swiftness, cost-effectiveness, and reliability compared to traditional government- issued currencies. Originating with Bitcoin’s inception in 2009 by the pseudonymous creator, Satoshi Nakamoto, cryptocurrencies have seamlessly merged the digital realm with the practicality of traditional cash. This digital form of currency not only facilitates everyday transactions but also enjoys the added layer of encryption and security, effectively preventing
unauthorized alterations to the money supply through a predefined algorithm. According to a 2022 Chainalysis report, ten countries have1 notably high levels of cryptocurrency adoption. These countries are China, Vietnam, Russia, the Philippines, Thailand, Ukraine, Brazil, India, Pakistan, and the United States. The level of regulatory attention on digital assets has significantly intensified in recent years.
Currently, no regulations restrict cryptocurrency usage in India, while the government has proposed legislation to prohibit all such operations except those related to research and development2. In India, cryptocurrency is currently unregulated, but the government has suggested a draft bill that would outlaw all cryptocurrencies except those used for research and development. The Reserve Bank of India (RBI), India’s central bank and monetary regulator, has also issued public warnings regarding the risks and legal difficulties related to cryptocurrencies3.
Contrastingly, the United States has witnessed a notable surge in cryptocurrency scrutiny, with both federal and state governments actively involved in exploring its regulatory framework. Federal agencies such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), the Department of the Treasury through the Internal Revenue Service (IRS), the Office of the Comptroller of the Currency (OCC), and the Financial Crimes Enforcement Network (FinCEN) have all played a significant role in shaping the nation’s approach to cryptocurrencies. While these agencies have been highly engaged in this arena, the formalization of comprehensive regulations has remained somewhat limited. Nonetheless, numerous federal agencies and policymakers have voiced their recognition of the technology’s pivotal role in the future infrastructure of the United States, emphasizing the importance of maintaining a leading position in its development4.
This article delves into a comparative analysis of cryptocurrency regulations in India and the United States, shedding light on the varying approaches each nation has taken in navigating the ever-evolving world of digital currencies.
Positive Impacts of Cryptocurrency
- Middlemen are not Every transaction is carried out one-to-one, and setting up audit trials is made simpler.
- These currencies have the potential to solve the issue of societal trust and, by making them more widely available, accelerate the process of economic development in poor
- Cryptocurrency transactions are free of processing fees since they are made possible by the public network of the cryptocurrency, known as blockchain technology, as opposed to other conventional payment methods like debit and credit
- It usually takes two or three days to process credit or debit Transactions involving cryptocurrency take ten minutes to process. This demonstrates how quickly transactions can be made while using cryptocurrency.
Negative Impacts of Cryptocurrency
- The price of cryptocurrencies can fluctuate dramatically in a short period, making them difficult to trade
- Although cryptocurrency users’ information is kept in a public ledger, there may be problems adhering to customer identification requirements or preventing fraud. This demonstrates the system’s lack of
- Cryptocurrencies work digitally, with proof of ownership confined to private keys, and this has become a prominent target for hackers, as many businessmen are unsure of how to protect this new type of digital
- Cryptocurrencies are thought to be damaging to the This digital currency uses blockchain technology, which forces computers all around the world to solve difficult equations to validate transactions. It can be profitable and is referred to as data mining. Bitcoin is awarded to the person who participated in it. A significant quantity of electricity is used in this computation process.
Role of Financial Institutions in India
Financial institutions are businesses that offer financial services such as accepting deposits, lending money, investing, and providing insurance. Banks and non-banking financial institutions (NBFIs)5 are the two primary categories of financial institutions in India. The RBI licenses banks to accept demand deposits and issue checks, but not NBFIs. Based on their ownership and operation principles, banks are further classified as commercial banks or cooperative banks. Commercial banks are governed by the RBI and the Banking Regulation Act of 1949, while cooperative banks are governed by the RBI and state laws6.
The entities known as non-banking financial institutions (NBFIs) operate as financial intermediaries without accepting demand deposits. Instead, they offer a diverse range of financial services, such as term loans, leasing, factoring, venture capital, mutual funds, and insurance, among others. Depending on their specific nature and functions, different regulatory agencies oversee NBFIs in India. For instance, the Securities and Exchange Board of India (SEBI) regulates capital market intermediaries like stock exchanges, brokers, and mutual funds. The Insurance Regulatory and Development Authority of India (IRDAI) supervises the insurance industry, while housing finance companies fall under the jurisdiction of the National Housing Bank (NHB). Additionally, certain NBFIs, including non-banking financial companies (NBFCs), all-India financial institutions (AIFIs), and primary dealers (PDs)7, are regulated by the Reserve Bank of India (RBI).
The regulation of financial institutions in India strives to ensure the financial system’s stability, efficiency, and integrity, as well as to protect the interests of depositors, investors, and customers. Various guidelines, standards, and rules are issued by regulators for the governance, oversight, and compliance of financial institutions. They also monitor and examine financial institutions’ performance and conduct and, if necessary, take remedial or punitive measures8.
The Reserve Bank of India (RBI) issued several circulars and cautions to discourage the use of cryptocurrencies and to restrict banks and financial institutions from engaging with them9. However, in March 2020, the Supreme Court of India overturned the RBI’s 2018 circular, which prohibited banks from providing services to cryptocurrency exchanges and traders10. This decision was seen as a substantial victory for India’s cryptocurrency industry, as it paved the way for increased innovation and investment in the sector.
However, the legal position of cryptocurrencies in India remains ambiguous, as the government has yet to enact any explicit legislation or regulation governing them. The government is concerned about the possible risks and misuse of Bitcoin for money laundering, terrorist financing, tax evasion, and fraud. The government has also indicated that it may adopt legislation to prohibit the use of private cryptocurrencies and to establish a digital rupee issued by the RBI. However, this law has not yet been introduced in parliament, and its details and effects are unclear11.
As a result, bitcoin financial institutions in India are operating in a grey area, with no clear guidelines or protection from regulators or the government. Depending on how the situation develops, they may face legal challenges or restrictions in the future. Instead of simply banning cryptocurrencies, the Indian crypto community has urged the government to take a more progressive and fair approach to regulating it. They suggest that cryptocurrencies can provide numerous economic benefits, including financial inclusion, innovation, job development, and global competitiveness. They have also urged that the government consult with numerous stakeholders, such as industry professionals, academics, civil society, and users, before making any Bitcoin policy decisions.
Impact on the Indian Economy
Cryptocurrencies have the potential to enhance financial inclusion in India by granting unbanked citizens access to digital payments and savings. As per a World Bank report, India is second globally in the number of unbanked adults, with approximately 190 million people lacking a bank account12. Cryptocurrencies offer a cost-effective, swift, and secure alternative to conventional financial services, particularly for cross-border remittances, which serve as a significant income source for many Indians. By eliminating intermediaries and minimizing instances of fraud and corruption, digital currencies can lower transaction processing costs. Cryptocurrency transactions are recorded on a public database known as the blockchain, ensuring transparency and accountability. Furthermore, blockchain technology allows for the deployment of smart contracts, which are self-executing contracts capable of automating numerous operations and lowering the possibility of human mistakes13. Cryptocurrency can make the world less dependent on cash and increase the mobility of money around the world. Cash is expensive to produce, store, and transport and poses security and environmental risks. Cryptocurrency can reduce reliance on cash and enable faster and cheaper transfers of value without the need for intermediaries or currency transfers14. Cryptocurrencies can open doors for innovation and entrepreneurship in India by fostering a dynamic environment for startups, investors, developers, and users. Several cryptocurrency-related businesses, including exchanges, wallets, platforms, and educational providers, have already surfaced in India15. Additionally, cryptocurrencies have the potential to drive research and development in emerging fields like artificial intelligence, machine learning, and the Internet of Things.
Recent Developments
- Taxation and Reporting: Cryptocurrency transactions could be subject to taxation, and users might be required to report their holdings and transactions to tax authorities. This measure would help tackle concerns related to tax evasion within the cryptocurrency.
- Investor Education and Awareness: The government could emphasize the importance of educating investors about the risks and benefits associated with cryptocurrencies and encouraging responsible investing practices and informed decision-making.
- International Cooperation: Recognizing the global nature of cryptocurrencies, India could collaborate with other countries to establish a coordinated approach to Cooperation in areas such as cross-border transactions and the prevention of money laundering could be essential in addressing challenges posed by the cryptocurrency market.
Legality of Cryptocurrency in USA
In November 2021, the Infrastructure Investment and Jobs Act introduced the first-ever references to cryptocurrencies in US legislation. This law included a limited number of provisions related to cryptocurrencies, which were referred to as “digital assets.” They were described as “any digital representation of value stored on a secure distributed ledger or a similar technology designated by the Secretary.” Among these provisions, there was a requirement for digital asset brokers to report transactions exceeding $10,000 to the IRS.16
Finding a uniform legal stance at the state level is challenging, but the United States is making strides in crafting federal cryptocurrency regulations. The Financial Crimes Enforcement Network (FinCEN) does not categorize cryptocurrencies as legal tender but regards cryptocurrency exchanges as money transmitters because cryptocurrency tokens serve as “alternative value to currency.”17 Similarly, the Internal Revenue Service (IRS) doesn’t recognize cryptocurrency as legal tender but defines it as “a digital representation of value that serves as a means of exchange, a unit of measurement, and/or a store of value,” and has issued tax-related guidelines accordingly18.
In the United States, cryptocurrency exchanges are legally permitted and are subject to regulation under the Bank Secrecy Act (BSA).19 In practical terms, this entails that providers of cryptocurrency exchange services are required to register with FinCEN, establish an anti- money laundering and counter-terrorism financing (AML/CFT) program, maintain appropriate records, and report their activities to the relevant authorities. Conversely, the US Securities and Exchange Commission (SEC) has expressed its view that cryptocurrencies are considered securities, and it applies securities regulations comprehensively to digital wallets and exchanges20. In contrast, the Commodities Futures Trading Commission (CFTC) has embraced a more lenient “do not harm” approach, classifying Bitcoin as a commodity and allowing the trading of cryptocurrency derivatives on public markets21.
So basically, cryptocurrencies are not considered legal tender in the USA, but Cryptocurrency exchanges are legal, and their regulation varies from state to state.
Regulation of Cryptocurrency in the USA
The world of cryptocurrency has rapidly evolved, gaining popularity and mainstream acceptance over the past decade. As cryptocurrencies become an integral part of the global financial ecosystem, the United States grapples with the complex task of regulating this dynamic and decentralized digital asset class.
At the federal level, cryptocurrency regulation in the United States falls under the purview of several key organizations, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), the Treasury Department, primarily through the Internal Revenue Service (IRS), the Office of the Comptroller of the Currency (OCC), and the Financial Crimes Enforcement Network (FinCEN). While these agencies have been actively involved in efforts to establish financial stability within the cryptocurrency market, there has been no formal issuance of comprehensive regulatory rules at this time.
It remains uncertain whether cryptocurrency regulations in the US can impact cryptocurrency prices. The regulatory landscape in the US is pivotal, as it allows the government to expand or restrict the industry. Typically, stringent cryptocurrency regulations in the US have the potential to affect cryptocurrency prices adversely. However, it’s reassuring for investors that the US is not focused on constraining the cryptocurrency sector but is instead working to enable financial institutions to offer digital currencies22.
Some of the important regulators of cryptocurrency in the USA are as follows-
The (FinCEN) – Financial Crimes Enforcement Network
In March 2013, the US Financial Crimes Enforcement Network (FinCEN) categorized cryptocurrency exchanges as “Money Services Businesses (MSBs),” obligating them to maintain records that verify their customers’ identities.
Since the implementation of this cryptocurrency regulation in the US, American cryptocurrency exchanges have been mandated to authenticate user identities before permitting them to engage in digital currency trading.
Consequently, anyone looking to invest in cryptocurrencies through a US-based cryptocurrency exchange is required to furnish the following information to the platform: their name, address, phone number, a picture of their identification document, and a selfie. Failure to provide these details can result in restricted access to the platform.
In addition to regulatory concerns, other security risks are associated with using foreign exchanges in the US. Hence, opting for US exchanges such as Coinbase, Binance, Gate, Kraken, Coinmama, and eToro is generally considered a safer choice moving forward.
The SEC – Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is responsible for overseeing stocks and various securities within the United States. The SEC has, on occasion, contended that cryptocurrencies should be classified as securities and thus fall under its regulatory authority.
It’s important to note that not all cryptocurrencies automatically qualify as securities. For instance, if a cryptocurrency has been generated through a decentralized mining process and lacks central control, it would not meet the criteria for being considered a security. Yet, in other instances, cryptocurrencies are indeed categorized as securities and fall under the jurisdiction of the SEC.23
If a cryptocurrency is determined to be a security, it necessitates proper registration with the SEC, which involves completing a series of regulatory paperwork. This registration process can result in additional expenses for both the developers and investors involved24.
The CFTC
The primary scope of the CFTC’s governing statute pertains to the regulation of derivative instruments like futures and swaps. While the CFTC has identified specific crypto assets as commodities, subject to its anti-fraud and anti-manipulation authority, it generally lacks the mandate to establish rules for overseeing commodity spot markets.
Nevertheless, the CFTC does have jurisdiction over offerings of margin, leverage, or financing for commodity spot trading aimed at retail investors. Beyond U.S. borders, many cryptocurrency exchanges permit retail investors to engage in margin trading for crypto assets. However, within the United States, cryptocurrency exchanges are required to register with the CFTC as futures exchanges if they intend to provide margin trading for crypto assets to retail investors. Furthermore, a futures commission merchant registered with the CFTC must facilitate the provision of margin, and these transactions must go through a clearinghouse registered with the CFTC. The CFTC has issued interpretive guidance that clarifies the circumstances under which an exchange can qualify for the limited “actual delivery” exemption from these requirements, but few, if any, have managed to meet these criteria.25
Also, Congress, the body responsible for enacting laws, has presented numerous bills concerning cryptocurrency in the course of several years. However, it has not succeeded in enacting comprehensive and substantial regulations that could serve as clear guidelines for both other government agencies and cryptocurrency firms. While there have been ongoing efforts, as of early 2023, Congress has not provided any regulatory direction or clear guidance.26
Comparative Analysis of Both Countries – USA and India
The regulatory approaches of India and the USA diverge significantly. India’s proposed legislation leans towards imposing severe restrictions on cryptocurrency activities, while the USA has adopted a more cautious stance with active engagement from multiple federal agencies but limited formal rulemaking.
India’s proposed restrictions raise concerns about stifling innovation and the potential for a vibrant cryptocurrency industry. In contrast, the USA’s more measured approach seeks to strike a balance between regulation and fostering innovation.
The differing approaches to cryptocurrency regulation also hold implications for global competitiveness. India’s proposed restrictions may deter investors and businesses, whereas the USA’s evolving regulatory framework aims to maintain its position as a global leader in cryptocurrency and blockchain technology.
Both nations acknowledge the risks associated with cryptocurrencies, but their strategies for risk management differ. India leans towards a more prohibitive stance, while the USA prioritizes balancing consumer protection with fostering innovation.
Suggestions
From a monetary standpoint, cryptocurrency can be a fantastic and innovative tool for the economic sector. In India, a few businesses accept Bitcoin; research into these businesses’ transparency, commercial enterprise modules, and individuals who deal with Bitcoin has begun. Cryptocurrency legislation can place Indians and India as a country on a platform that promotes innovative growth.
India must transition from traditional payment systems to actively participate in the emerging IT-based era. Completely banning cryptocurrencies would discourage startup entrepreneurs; therefore, it is not the ultimate solution. What is crucial is the implementation of proper regulations with secure Know Your Customer (KYC) norms. The key lies in effective policymaking. This digital revolution has the potential to generate new job opportunities across various sectors, from IT developers to marketers, thereby reducing unemployment rates and ultimately aiding in poverty alleviation.
The United States is at a critical juncture concerning the regulatory approach to cryptocurrencies. Globally, regulations are taking shape, yet the U.S. remains mired in fragmentation and a lack of consensus. In a borderless digital asset landscape, the inability to streamline regulation is placing American businesses at a competitive disadvantage.
The U.S. currently lacks a cohesive regulatory framework for cryptocurrencies, with individual states handling digital assets differently. This patchwork approach creates confusion and inconsistency, hindering business operations.
Key regulatory agencies, such as the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC), are not providing clear guidance, leading to confusion and legal disputes. Legislative efforts have also stalled due to partisan politics.
Regulators and legislators must act swiftly and collaboratively to keep pace with the global digital asset industry. The U.S. should extend basic investor protections from traditional financial markets to digital assets and adapt regulations to the digital era. The SEC’s recent move to include digital assets in the “custody rule” is a positive step, but timely action is vital.
Regulators must also acknowledge the unique characteristics of digital assets and adopt a collaborative approach. Fostering innovation, providing clear guidance, and avoiding punitive measures are key to ensuring the industry’s healthy growth.
In a trillion-dollar digital asset industry, clear guidance for traditional banks is essential to avoid concentration risk. The U.S. must embrace change, create a regulatory framework that reflects the technology, and collaborate with the industry for mutual success.
Conclusion
In conclusion, cryptocurrency stands as a profound development of the 21st century, reshaping the financial landscape and posing unique regulatory challenges. With its unregulated allure, cryptocurrencies have swiftly become a force to reckon with, propelled by continuous technological advancements. These digital assets, fortified by cryptographic security measures and harnessed through blockchain technology, offer a host of advantages, from reduced reliance on intermediaries to the potential for financial inclusion and swift, cost-effective transactions.
However, the global regulatory response to cryptocurrency diverges notably, exemplified by India’s inclination toward stringent measures and the United States’ cautious yet active engagement. India’s proposed legislation seeks to impose significant restrictions, potentially stymying innovation and entrepreneurship in the cryptocurrency sector. Conversely, while actively involving federal agencies, the United States has not formalized comprehensive regulations, aiming to balance the need for innovation with adequate consumer protection.
These regulatory approaches have far-reaching implications, impacting the pace of innovation, global competitiveness, and risk mitigation in each nation’s cryptocurrency ecosystem. India could benefit from embracing cryptocurrencies with well-crafted regulations that facilitate economic growth and provide financial stability. In the United States, collaborative, forward- thinking regulatory frameworks are essential to maintain leadership in a rapidly evolving digital asset industry while protecting consumers. Clarity, consistency, and adaptability will be critical to navigate the ever-changing landscape of cryptocurrencies and blockchain technology.
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24. Ibid.
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