By authenticating transactions on a public ledger, cryptocurrencies seem to provide cost savings and authenticity to global users, but its reality seems far different. Cryptocurrencies have evolved as a strong asset class with relatively faster growth when compared to other assets like gold, oil and real estate. Hence, the mass adoption of cryptocurrencies has been witnessed by exposing the population to risks like none before.
HIGH VOLATILITY
The cryptocurrency market witnesses sudden shifts in the market sentiment that can result in significant and rapid price movements. The intensity is higher in the crypto space when compared to the traditional security markets.
Systematic risk is present in cryptocurrencies as it is inherent to crypto markets. The risk could also be specific to the change in the people involved in the project and its fundamentals.
CYBER RISKS
Even though the decentralised platforms are to offer maximum security, cryptocurrencies and crypto tokens have been witnessing several cyber threats due to hacking and anonymity. Though the transactions are traceable, it is difficult to trace the people behind the transactions due to the anonymous nature of blockchain technology. Hence, it is important to understand the security measures adopted by crypto wallets and exchanges.
In 2021, there have been market changes due to uncertainty in market regulations by Governments. With some countries banning cryptocurrencies, fake news and speculation plunged the crypto market. With the way the Reserve Bank of India (RBI) dealt with cryptocurrencies previously, people were sceptical of Government regulation. The government’s concerns arise from the criminal and terrorist groups that use the crypto market for funding their operations. This should ideally call for regulatory landscape faster than it is currently progressing.
Regulations will help enhance investor protection and help mitigate risks associated.
HOPE FOR REGULATION
Tax-based concerns have come to a halt with the 2022-23 budget proposing a 30% tax on the income generated from transactions of virtual digital assets. Defining virtual digital assets has brought light to trading and transactions in the crypto space. Banks receive encouragement to support businesses in the crypto ecosystem.
With further regulation, the adoption of Blockchain technology would increase rapidly. Technology-backed companies imply innovation and job creation leading to economic growth. With businesses such as WazirX in India growing multifold in 2021 and Fortune500 companies seeking crypto experts and hiring for data scientists, human resource professionals, software engineers, compliance, legal, marketing and sales professionals in crypto related positions, job creation is already on the rise.
A financial system with CBDC would compete with the traditional financial system globally and bring in more financial inclusion through bringing in business activities onto the digital financial system and access to digital financial products and services. Strong preference for cash and digital illiteracy are still barriers.
The right set of regulations helps overcome the risks and crimes by providing proper legal support to businesses and remedies to the victims. The Budget session has brought hope that regulations in the crypto space are on the way which seems like a step towards welcoming the adoption of blockchain technology in other sectors.
Regulatory Sandboxes have been introduced by the U.K. Financial Conduct Authority (FCA), The Bank of Thailand, Australian Securities and Investments Commission and the state of Arizona to incentivize innovation and experimentation in blockchain technology with a risk-free development environment. Sandboxes provide a mechanism for regulators and law enforcement to come up with policies governing Blockchain technology while policing the industry for malicious actors and scam artists. Such a system may not be possible in India as allocating sizeable public funds is a step our country cannot afford. It remains to be seen how the Government through NITI Aayog implement efficient and robust blockchain policies in the country.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: Outlook Money, Economic Times and Bloomberg Quint