Cryptocurrency – A Cautionary Tale for India

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Recent Events in the Crypto-world and a Need for Regulatory Oversight

– Subhojit Shome (subhojit@vinodkothari.com)

Introduction

There are two recent events in the world of crypto that warranted this article – the first one, in order of chronology, fundamentally altered the way that a blockchain (the underlying ledger) for cryptocurrency validates transactions while the second exposed how a cryptocurrency, without underlying value, can be used to window dress a balance sheet and lure in investors.

The second incident, of course, refers to the FTX debacle that has received global media coverage and continues to grab headlines. The first event, Ethereum moving to ‘proof of stake’ consensus mechanism, however, may be a more obscure event to the public eye and likely to have caught the attention of only the hardcore crypto enthusiast, fintech departments of financial institutions and the financial stability divisions of financial market regulators and ministries.

This article, to all intents and purposes, is a ‘cautionary tale’ where we use these two events to explore how cryptocurrency, whether deliberately or inadvertently, may build a house of cards and there is an urgent imperative that regulators look beyond PML/ CFT issues, the ‘usual suspects’ when it comes to crypto, and delve into issues surrounding investor protection and market surveillance.

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Introduction of the Digital Rupee (e₹)

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RBI announces the launch of the first pilot

– Subhojit Shome, Senior Executive | finserv@vinodkothari.com

On 7th October, 2022 the RBI published a Concept Note[1] on Central Bank Digital Currency (CBDC) that intended to “create awareness about CBDCs in general and the planned features of the digital Rupee, in particular”. Chapter 8 (“Way Forward”) of the Concept Note provided for a phased approach towards implementation that involved building a prototype and running large scale pilots before actual launch of the ‘Digital Rupee’. The guiding principle being that the introduction of Digital Rupee should cause only a minimal or no disruption to the financial system.

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Security Token Offerings & their Application to Structured Finance

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Moving to DeFi

– Subhojit Shome, Executive | subhojit@vinodkothari.com

Introduction

As per a Forbes article[1] published in early 2021, DeFi and Security Token Offerings (STO) had scaled new heights with 2020 being “a banner year for capital formation and secondary trading” using security tokens. DeFi applications were reported to be prevalent across 15 countries around the world (including the major developed economies) and 39 of the top 100 largest banks in the world were reportedly working on security tokens or blockchain applications. Expert estimates[2] predict the security tokens industry to surpass the market volume for cryptocurrencies in the next five years and in terms of issue proceeds, the global security token market reaching $3 billion by 2025.

Figure 1: Estimated Growth of Security Token Offerings (STO)[3]

Blockchain-based tokens can be described as digitally scarce units of value the characteristics and circulation of which are prescribed via computer code.[4]

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Financial Services firms foray into the metaverse

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Beyond Social Media & Gaming

– Subhojit Shome, Executive | finserv@vinodkothari.com

Introduction

The ‘Metaverse’ has become the latest favourite buzzword on Wall Street with players from Big Tech, Gaming, Entertainment and the FMCG Industries touting it as the best thing to happen since sliced bread.

It is now the turn of the Banking and Financial Services Industry to jump onto the bandwagon and with big ticket traditional players, like JPMorgan and PwC, buying up prime virtual real estate in the metaverse and with revenue estimations from opportunities in the metaverse being projected at $1 trillion and beyond,[1] other players (both traditional and new age) cannot help but take notice.

In this overview, we attempt to provide a bird’s eye view of what the metaverse is and the opportunities that it offers specifically to those involved in the financial services space.

The Many Definitions of the Metaverse

The term – ‘Metaverse’ – is borrowed from American writer, Neal Stephenson’s dystopian sci-fi novel – Snow Crash – wherein it is used to describe a virtual-reality based successor to the internet.[2] 

In the real world context, the term has been variously defined and used, be it by tech gurus or c-suite executives. In general it has come to imply an interactive digital world with online communities providing immersive experiences.

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CBDCs in India – Another step towards Digitalisation

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finserv@vinodkothari.com

Related write-ups:

  1. CBDCs in India – A Leap of Faith?
  2. Untangling the Mystery of Virtual Digital Assets
  3. The Rise of Stablecoins amidst Instability
  4. Recent Trends in Crypto-Industry: India & Abroad

Untangling the Mystery of Virtual Digital Assets

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– Shreyan Srivastava (finserv@vinodkothari.com)

An Insight into Crypto, Tokens and NFTs

Background

The Union Budget Speech 2022-23 created quite a stir in the cryptocurrency industry once again, as the Hon’ble Finance Minister proposed a 30% blanket taxation on virtual digital assets (“VDAs”). Given the plethora of terms existing such as ‘virtual currencies’, ‘digital currencies’, ‘cryptocurrencies’, ‘NFTs’, ‘altcoins’ and so on, the question arises as to what these individual terms entail and which ones fall under the category of ‘VDAs’ and where does the Central Bank Digital Currency (“CBDC”) fall under the maze of these new terms.

The Finance Bill, 2022 appears to provide some clarity through the proposed clause 2(47A) of the Income Tax Act by defining VDAs. To that effect, the current article is dedicated to clearing the confusion with respect to CBDCs and VDAs, arguing that for anything to qualify as a VDA it needs to progressively fulfil the criteria of asset → digital → virtual. Read more →

CBDCs in India – A Leap of Faith?

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Introduction

Right from RBI’s (in)famous March 2018 Circular (‘Circular’) banning all operations by virtual currency exchanges (VCEs) to the Hon’ble Supreme Court’s verdict upholding the constitutionality of cryptocurrency and its exchanges, the debate over the adaptability of cryptos has led to a demographic split in India.

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