Nations keen to embrace crypto, but legal support must for buyer confidence

Emerging from the shadows over the past two years, cryptocurrencies and, to a certain degree, digital national currencies, are gaining traction due to lower administration costs, ease of delivery, and instant transfer. After Donald Trump’s victory in the US presidential elections, the new DeFi (decentralised finance) currency regime is gaining momentum with a slew of announcements that give credence to his campaign commitment to crypto.

Read the first part of this series here

Governments around the world have already started embracing the crypto revolution. As in the summer of 2024, governments around the world held 2.2 per cent of the total supply of Bitcoin.

Reportedly, the US government already holds over 213,297 BTC, and US BTC exchange-traded funds (ETFs) already command 5.04% of BTC’s market cap.

China welcomes crypto

Following close on the heels of the US is China. If the Trump administration eventually adopts the crypto as a US Federal reserve currency, China is likely to have a more welcoming attitude towards the new kid on the block.

Already, the Chinese government, via a Shanghai court, has ruled that personal ownership of cryptocurrencies is not against Chinese law. The crypto community sees it as a potential softening of China’s historically rigid stance on Bitcoin and other cryptocurrencies. Commercial crypto-related activities continue to be banned.

Although China continues to view cryptocurrencies as a threat to financial stability, there is a shift as demonstrated by developments such as Nano Labs — a China-based crypto-mining chip company — accepting Bitcoin payments.

Europe is the second-largest cryptocurrency economy in the world, accounting for 17.6 per cent of global transaction volume. Its booming cryptocurrency market is adopting new financial instruments that are sure to attract more traders.

The Bitcoin storm is changing traditional transaction methods not just in the developed world but is already an active coin for imports in countries like sanction-riddled Iran.

The Central Bank of Iran is using Bitcoin for imports. El Salvador has already declared Bitcoin as its official currency along with the US dollar.

How markets move

No secondary data is available on Bitcoin reserves held by the Indian government but the Reserve Bank of India (RBI) does not look favourably upon Bitcoin trade. This even as governments around the world are slowly moving towards Bitcoin reserves and, as proven by Germany’s sale of its Bitcoin reserves, they move the markets to a large extent.

Notwithstanding the Indian government’s indifference to global crypto trends, Sukhdev Kumar of Star Traders says, “Despite no clarity on government policy, crypto options and futures trading is gaining momentum and people are betting heavily on the currency prices. The norm is to buy the stablecoin USTD, which is more or less on a par with the US dollar, and then swap or buy Bitcoin with it. The fee is much lesser if you transfer USTD to the BTC wallet.”

Also read: How a US-based Indian techie was duped of Rs 4 crore in 'pig butchering scam'

Crypto trader Jai Singh says as the demand for bitcoin increases, the supply of USDT is pressured at times. “In India, black money is being pumped into purchase of USTD, which in turn is used to buy Bitcoin. As the demand for Bitcoin increases, the demand for USTD increases, thus maintaining the hegemony of the US dollar. The more the craze for Bitcoin, the more is the demand for USTD, which runs into short supply at times, giving an upward mobility to dollar against the rupee.

USDT in India has a circulating supply of 132.59B coins and a max supply of 132.59B USDT.

Crypto liquidity

With such large trading volumes, how do these crypto companies maintain liquidity?

Sukhdev Kumar says, “My company is registered in the UK and we have crypto liquidity providers. They offer a continuous supply of digital assets in cryptocurrency markets, enabling traders to buy and sell quickly at competitive prices. Crypto exchanges in India draw liquidity from overseas exchanges such as Binance to support the futures market. In the absence of ready counterparties, they strike back-to-back deals with overseas bourses to facilitate futures trades which offer high leverage — several times more than what’s allowed in equity futures.”

In derivative transactions, the exchanges do not remit funds to place their margin on the overseas exchanges but place the stablecoin USDT — the proxy for the dollar — as a margin for the futures trade.

Also read: Having no mechanism to regulate cryptocurrencies will be dangerous: SC to Centre

RBI’s push to CBCDs

Though silent on the crypto, the RBI has currently launched a test pilot of the digital version of the Indian Rupee. The Digital Rupee, using blockchain distributed-ledger technology, was proposed in January 2017 and launched on December 1, 2022.

But the Trump administration is hostile to Central bank Digital Currencies (CBDCs). It remains to be seen if Trump’s opposition and intended ban of CBDCs in any way changes the RBI’s stance in favour of cryptocurrencies, compelling it to draft a policy framework to regulate the digital decentralised currency.

“It would be a dangerous threat to freedom, and I will prevent it from coming to America,” the US president elect said about CBDCs at a rally in New Hampshire.

Future reserve currency of the world?

Although the Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in future. Transactions, including bonds, stocks, and other financial assets, could eventually be traded using the technology.

Even before the Trump administration taking over the reins, negotiations are on between commerce secretary pick Howard Lutnick, CEO of iconic global financial institution Cantor Fitzgerald, and the firm behind the world’s largest stablecoin, Tether, to accept Bitcoin as collateral for loans in traditional finance.

There is talk of including crypto as US Federal Reserve currency.

As speculation gains momentum about Bitcoin one day becoming the world’s reserve currency, there is a lack of unanimity about whether the crypto status should be set as an asset and a commodity rather than a transactional currency. This, given its extra volatility. Nearly $1 trillion was wiped off their total value in May this year. Though companies like AT&T, Microsoft, Rakuten accept crypto, the latter status seems a remote possibility till its wider acceptance and circulation.

Also read: 'What's good for another market need not be good for us': RBI governor on crypto regulations

Need for legal backing

Globally, as also in India, crypto traders lament the absence of basic consumer protection laws, such as the provision of refunds arising from disputes between merchants and customers. Apart from this, other pieces of legislation that may be relevant are consumer protection law, contract law, laws related to money laundering, intellectual property law, and banking laws.

“But if black money is traced in any crypto transaction, up to 46 accounts associated with that particular transaction get frozen”, says Dinesh Kukreja of Unicash.

During the course of a video interview, a Bitcoin trader wanting to remain anonymous gave a preview of the kind of money being invested and the returns on investment in crypto. A diamond trader’s business account carried Rs 42 crore in crypto.

Various estimates show cryptocurrency crime is on the rise, keeping pace with the market’s rapid growth. According to financial research firm Autonomous NEXT and Crypto Aware, which works with investors affected by crypto scams, “about 15 percent of cryptocurrencies have been stolen between 2012 and the first half of 2018, representing a cumulative $1.7 billion in value at the time of the theft”.

Yet, Lex Sokolin, a partner and global director of fintech strategy, estimates that as much as 85 per cent of crimes go unreported.