Cryptocurrency Innovations And Government Regulations: Shaping The Future Of Digital Assets

In a candid conversation with Dr. Sujata Seshadrinathan, Director of IT and Processes at Basiz Fund Services, we explore critical cryptocurrency trends, delving into Ethereum's energy reduction, the impact of EU's MiCA regulations, and the role of government policies in shaping the future of crypto. Uncovering just how important emphasizing transparency and effective regulations will be in the cryptocurrency landscape.
In the ever-evolving landscape of cryptocurrencies, significant developments are taking place that will shape their future and impact the global financial ecosystem. Ethereum, one of the leading cryptocurrencies, has made headlines by drastically reducing its energy consumption, raising hopes for similar changes across the industry. Meanwhile, the European Union's approval of comprehensive regulations for cryptocurrencies marks a pivotal moment, with implications for countries like India. As the role of government policies and regulations becomes increasingly important, it is worth examining the potential impact they may have on the future of cryptocurrency.

Q1. Cryptocurrency Ethereum has significantly slashed its energy use, do you think similar changes will follow?

Many times technology innovations come with cost or efficiency overheads. Once the technology gains acceptance, these issues are addressed via elaborate research and development. In case of cryptocurrencies, while their rapidly evolving payment system and opportunities accrued thereof have a proven track record by now, the environmental footprint in form of steep energy consumption of this system is a cause of concern. Many factors impact the magnitude of this cost, the major one being the consensus mechanism, mining in this case, which is used to validate and execute transactions in the underlying blockchain. Ethereum right from the outset had a stated target of being a green blockchain to be achieved through more efficient usage of energy. Through the Ethereum Merge a network update to transition it from the current proof of work (PoW) to a proof-of-stake (PoS) consensus mechanism was carried out recently. This is expected to result in a 99% reduction in energy costs of transactions. Energy usage efficiency of cryptocurrency is one of the major stumbling blocks in its proliferation and Ethereum’s move will definitely prompt more substantial action in this regard. The current state of energy usage by most other cryptocurrencies is simply unviable. Concrete action in this direction will certainly bring about progress in addressing this concern in the entire cryptocurrency ecosystem.

Q2. The European Union has approved the world’s first set of comprehensive rules to bring cryptocurrency under the ambit of regulation, what does this mean for India?

The Markets in Crypto Act, or MiCA passed by the European Union Parliament is the first and most comprehensive regulatory framework for digital assets in the world. Rules and regulations for crypto platforms, currency operations as well as asset trades have been clearly defined here. The lack of rules and disclosure requirements in this domain have put the investors at great risk, the resultant losses have been great with many unscrupulous players making steep profits. The MiCA while addressing these issues also gives the European Securities and Markets Authority, or ESMA, powers to monitor and control crypto platforms. MiCA additionally addresses environmental issues caused by crypto.
India was one of the first countries to understand the dynamics of the crypto both as a digital currency as well as an asset. The Cryptocurrency Bill was to be tabled in the parliament in Oct, 2021, which did not happen and at the moment is still work-in-progress. The Reserve Bank of India (RBI) has been proposed as an issuer as well as a regulator of digital money within well-defined, benevolent rules. The issue addressed by the Finance Minister and officials from RBI clarifies that regulations regarding all aspects of cryptocurrency and assets will be elucidated in the bill. The framework will define necessary disclosures, and ensure transparency in operations. MiCA confirms many of the proactive actions regarding cryptos taken by the Indian government. It is also expected that the Indian Bill will now be able to draw inferences from MiCA.

Q3. There have been talks about synthesized paper taking into account IMF and FSB findings about cryptocurrency by the Finance Minister. What are these papers and what is the significance of their findings?

Union Finance Minister Nirmala Sitharamanji while speaking about the Macrofinancial Implications of Crypto Assets in a session with G20 finance ministers and central bank acknowledged the work of the IMF and the FSB in bringing out key elements of policy and regulatory framework for cryptos. She also put across the need for a synthesized paper that would present a clear perspective integrating the macroeconomic and regulatory implications of crypto assets. Cryptocurrency, as a decentralised, immutable and trustworthy system will redefine the way money is used and transactions are executed. It is the solution to many challenges of cross-border transactions increasingly executed in a world integrated by business and economic requirements. It is also the most debatable IT innovation of modern times which therefore necessitates a global policy and regulatory framework. While most countries today have their own views on cryptocurrency and assets today, a global policy framework elucidating all crucial aspects of it is the need of the hour. Crypto assets are borderless and substantial international coordination for policies regarding regulation, settlement, taxation etc. will form the basis for the crypto ecosystem. The synthesis between the findings of IMF and FSB will be significant in defining this global policy framework

Q4. What role do you think government policies and regulations will play in the future of cryptocurrency, given its negative correlation with overall financial market trends, by the effect of monetary policies and business cycles not controlled by central banks?

Cryptocurrency is the most futuristic IT innovations of our times which is designed to work as a medium of exchange without the intervention of any central authority maintaining the transaction on it. It however has no physical form and is a virtual, decentralized system that has eliminated traditional transaction intermediaries, such as banks. Though crypto currencies and assets have the power to redefine the very way transactions are executed and businesses are conducted, it has been seen in the recent past that they are prone to malpractices that can even threaten economic integrity and stability. Pragmatic solutions are being sought to resolve these issues like disclosures of source of funds, transaction and exchange rates etc. across economies via regulatory mechanisms and controls. This framework of policies and regulatory control form the foundation for the adoption of crypto. Its ability to foster trust and greater transparency in transactions is being clouded by the lack of these at present. In both its forms, as a legal tender as well as an asset class, the crypto will thus realise its full potential when governments will lay down all the necessary policy and regulatory framework.