Regulatory Challenges and Opportunities in Cryptocurrency: A Comparative Study of India and the U.S.

IAMAI v. RBI and SEC v. Ripple Labs, two cases from different contexts of law, ponder questions at the bedrock of what cryptocurrency is, and just how far the writ of regulatory authority reaches. In IAMAI, the Indian Supreme Court firmly impresses this principle of proportionality: the act of regulation should be proportionate to demonstrated risks and not speculative. What is different in this case is that the SEC here has been far more aggressive than its counterpart in reaching for a settled securities framework to apply over top of a new digital asset. To that extent, divergence indeed extends only to even deeper philosophical differences in regulation that separate jurisdictions in which India is trying to read into a more coherent, integrated legislative scheme than in the United States, which remains wedded to an approach founded upon a regulatory enforcement action.

Analysis of the Digital Currency Bill 2021

The Digital Currency Bill 2021 aims to develop an integrated overarching framework of regulation that will govern both public as well as private digital currencies. In comparison with this approach, the United States is much more away from this kind of scenario, wherein their case-by-case affair regulates their digital currency. This means introducing CBDC together with regulating private currencies in the country proves the purpose of going for embracing innovation but gets stuck at the regulatory control aspect. In this context, the harmonious approach runs counter to that patchwork regulatory structure in the United States because different aspects of cryptocurrency regulation are under the jurisdictions of the various states.

An important area of convergence between the two approaches is the recognition of financial stability and innovation. In fact, while both jurisdictions appreciate the possible benefits of blockchain technology and digital assets, they control the risks associated with these. The difference in approach is on grounds that the Indian approach, post-IAMAI and through the Digital Currency Bill, especially keeps focusing on legislative clarity and overall regulation. On the other side, the U.S. approach-is, in fact, quite well illustrated in the case of Ripple-whose aim is that digital assets filled prevailing regulatory frameworks through interpretation and enforcement.

It is equally interesting to note some contrasts in treatment of consumer protection. While the IAMAI judgment was critical of any undue protection of business activities, however still showed regard for the concerns about regulation, the Digital Currency Bill propounds a more specific, if general, framework for consumer protection. Investor protection offers in the case of the SEC in the matter of Ripple present a more particular lens through which securities regulation can be viewed. Those differences in emphasis reflect different priorities and other differences between the regulatory cultures of the two jurisdictions.

International effects of these trends in regulatory development are of great importance. Both the IAMAI and Ripple decisions have already started having an impact, not just in an immediate jurisdictive sense but also extra-judicially. In one sense, the Indian Supreme Court’s resort to proportionality and evidence-based regulation offers an important model on which other jurisdictions may borrow or steal in charting their own cryptocurrency regulations.

The judgment in the Ripple case is going to have tremendous potential to decide the future course of different digital assets that are at large around the globe.

It promises a few big trends in the regulation of cryptocurrencies in the near term. First, there is increasing realization that forward-looking regulation requires a clear, overarching framework that tolerates innovation but still exercises sufficient oversight. Second, international coordination in regulating inherently borderless digital assets becomes a more salient concern. Finally, achieving a correct balance between incentives for innovation and enforceability of compliance is a hard aspect that needs very careful calibration.

It is evident, therefore, with the aid of landmark cases and the regulatory efforts undertaken by India and the United States that suitable regulation of cryptocurrencies indeed is daunting. Examples such as India and the United States afford an opportunity to make a comparison and contrast of approaches and strategies adopted by these jurisdictions. Important inferences could now be drawn from this analysis.

Balanced approach: The kind of balanced approach towards the state in considering possible advantages and disadvantages with regard to digital assets would be effective in governing cryptocurrencies. The decision of IAMAI ensures evidence-based proportionate regulation criterion which would provide a robust framework in the direction of achieving this type of balanced approach. This is furthered by the manner in which the omnibus approach adopted in the Digital Currency Bill 2021 provides for a structured environment for public currencies as well as private currencies.

Regulatory innovation, as in the case of Ripple: while the application of conventional regulatory frameworks to digital assets presents challenges unique in every direction, the requirement for novel approaches towards the regulation of such products is well elicited by the classification problem of cryptocurrency products vis-à-vis pre-existing legal categories.

Although much legality clings to cryptocurrencies, they cannot be shackled into traditional regulatory categories in their most basic sense. Perhaps new regulatory approaches or new legal frameworks would be necessary for digital assets.

Third, because cryptocurrency markets are global, regulation also needs an international outlook. Although the approaches adopted by different jurisdictions reflect the local legal and regulatory traditions, such approaches have had to converge toward a more standardized standard in the regulation of cross-border transactions relating to digital assets. This would be indicative of better international cooperation and coordination in the formulation of regulations.

But it seems the real challenge for the development of central banks and regulatory agencies lies ahead in the cryptocurrency space. The development of CBDC, as it is going to be in the case of the Digital Currency Bill, represents a next step in how legacy financial institutions are coming to terms with the digital revolution; likely, part of an appropriate public-private mix to cement a regulatory landscape that will take the best of coordinated stakeholder involvement.

Lastly, the constantly evolving regulation of cryptocurrency highlights the requirement to be flexible in the framework formulated. The overall policy should evolve with times as technology is developed and thus preserve their basic objectives of stabilizing the financial situation and consumer protection above all. In essence, it would call for principle-based regulation that could be pliable enough to evolve with the times of emerging technological development but, in return, would offer sufficient control. These moves in cryptocurrency regulation represent giant strides into the continuing evolution of financial regulation into the digital age. All these lessons learned from such cases, and through such regulatory initiatives, will inspire the development of cryptocurrency regulation around the world as digital finance molds the financial sector.

Author: Kaustubh Kumar, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at IIPRD. 

References

1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5003137
2. https://www.financialexpress.com/business/digital-transformation-ripple-opposes-sec-appeal-of-ruling-that-crypto-isnt-a-security-3231992/
3. https://www.irccl.in/post/future-of-virtual-currencies-in-india-a-critical-analysis-of-iamai-v-rbi
4. https://www.btcpolicy.org/articles/sec-vs-ripple-labs-ruling-key-issues-and-implications