The Indian government is planning to introduce a bill during the ongoing winter session of Parliament to classify cryptocurrencies as financial assets while protecting the interests of small investors. In all likelihood, the bill may set a minimum amount to invest in cryptocurrencies, while prohibiting their use as legal tender or currency substitutes. The bill also proposes to lay the groundwork for the creation of the official digital currency to be issued by the Reserve Bank of India (RBI) and regulated under the RBI act, according to a report in NDTV.
From the standpoint of investors, cryptocurrency regulation is quite important. With the right kind of regulations in place, the government can make the cryptocurrency market a safer environment for investors.
Here are 5 reasons why cryptocurrencies need to be regulated:
1) Prevent market manipulation and protect investors: Market manipulation and price volatility are common in cryptocurrencies. Take, for example, Bitcoin, the world’s oldest and most popular cryptocurrency, which rose to all-time highs since the beginning of 2021, before plummeting and losing a huge amount of its value. So, the lack of authorised information on these digital assets and the technological complexities associated with them makes it imperative to put regulations in place for safeguarding investors.
2) Allow select cryptocurrencies: Thousands of cryptocurrencies exist around the world. Most investors, however, are only familiar with a few of those, such as Bitcoin, Ether, Ripple, and Dogecoin among others. They hardly have any knowledge about the thousands of other virtual assets. So, to protect customers, a regulatory authority clearing cryptocurrency is required, which can disclose all information about the performance of the digital assets, their risks, and potential.
3) Understanding risks associated with technology: Technology is advancing at a breakneck pace. This carries a significant danger, as such changes have the potential to render technology, including blockchain, outdated in the future. Given the rapid rate of technological change, information infrastructure and professional financial advisors skilled in cryptocurrency are required. That way, investors can understand the technological risks of cryptocurrencies and make informed decisions.
4) Online fraud and cyber security risks: Investing in cryptocurrencies comes with another risk — online fraud. Hacking is a major threat worldwide, and cyber-attacks have become common. One cyber-attack could result in losses for investors who have put their savings in cryptocurrencies. Through regulations, the authorities can implement measures to help cryptocurrency investors protect their assets. Also, investors can address concerns or reclaim their investments in case they lose them.
5) Money laundering: Any unregulated system has the ability to fund criminal acts. As a result, a client due diligence process akin to that of a bank is required. This can help in keeping track of investors’ real identities and verifying their locations when they are buying or selling cryptocurrencies. Any infringement of such norms should be met with severe sanctions.