The Walmart-Flipkart deal arithmetic deconstruct has proved how wrong government policies have resulted in dollar drain. Had it not for the unfriendly policies, Flipkart, the Indian e-commerce unicorn, would have been worth trillions, if they were domiciled in India. India’s shortcomings to make favourable laws in a timely manner to fuel growth for e-commerce start-ups has ended up destroying wealth of Indian venture investors in comparison to global peers, the U.S. and China. In April, we saw an identical knee-jerk reaction from the Reserve Bank of India (RBI) on the cryptocurrencies matter.
The government of India is a silent spectator, watching from sidelines. The RBI has not banned but issued a clampdown on flourishing crypto exchange business. It has asked all RBI-regulated entities like banks not to deal with companies engaged in crypto business. In another turn of events in May, the Central Board of Indirect Taxes is considering applying an 18% tax on exchange operations, which it would view as “intangible goods”.
Exchanges play an important role for growth of any market by providing price discovery of assets, capital formation, and finally lead indicators of business and the economy. These exchanges for cryptocurrencies (altcoins) also traded in algorithmic tokens, which are programmable assets. These so-called tokens have no inherent value by themselves but represent the value of the decentralised application (Dapp). These tokens are like loyalty points.
Entrepreneurs use the ICO (Initial Coin Offering) primary market model for a token sale and raise funds for their blockchain projects. These tokens are then listed on crypto exchanges for secondary trade. These exchanges provide the required liquidity to token investors. India could have seized the moment by becoming a crypto or token-friendly nation. The RBI could have encouraged entrepreneurs globally to use India as a gateway to usher the next generation blockchain technology.
The government of India should have leveraged the financial expertise, regulatory experience from SEBI and the RBI to adopt the best practices releasing a policy framework for ICO & trading of tokens on exchanges. India is the world’s second largest country in terms of Internet users and sheer population. Instead of giving them a platform for growth, the government pushed entrepreneurs to domicile their start-ups, raise funds in crypto friendly nations like Switzerland or Singapore. With blockchain startup entrepreneurs in India, today there is a deep sense of uncertainty over the future of crypto regulations. Unclear policy, confusion within the different regulatory agencies give a signal to entrepreneurs that India is not open for business.
How welcoming it is to do business when on the New Zealand government website, it says that “Given the bespoke nature of cryptocurrency-related financial services, we encourage you to approach us early about the services you plan to offer.” New Zealand has clear guidelines that if you provide a ‘financial service’ related to cryptocurrencies, you need to comply with the ‘fair dealing’ requirements in the Financial Markets Conduct Act 2013 (FMC Act).
Exchanges issuing their own cryptocurrency to facilitate trading fall within the financial service category of ‘issuing and managing means of payment’. Exchanges allowing cryptocurrency trading fall within the financial service category of ‘operating a value transfer service’. If you’re a wallet provider storing cryptocurrency or money on behalf of others, and you facilitate exchanges between cryptocurrencies or between money and cryptocurrencies, your services fall within the category of ‘operating a value transfer service’. If you arrange cryptocurrency transactions, you are providing the financial service of ‘operating a value transfer service’. If you provide transaction services in relation to cryptocurrencies or tokens that are financial products you may have obligations as a broker under the Financial Advisers Act 2008.
The BSE and NSE have a wealth of capital markets experience at the helm, and years of understanding from a process-driven traditional stock exchange. They have the potential to redefine India’s perceptions and develop new industry standards for token listings. The blockchain era has just begun. It’s not late, India can still create an era of trust with entrepreneurs, openness to raise funds, and global acceptance for the crypto industry.
( The views expressed in this article are not those of Fortune India. )
The author is an angel investor with a portfolio of more than 80 startups. He is also an investor in cryptocurrencies.