Wild West Memo – Crypto is an Asset Class

The Finance Bill 2022 was the first legislation in India to define crypto assets. “Virtual digital assets,” he said, are – I condense it here – a digital representation of exchanged value with the promise or representation of inherent value, or functioning as a store of value or a unit of account.

Still, there is a tendency among some to label the crypto ecosystem as the Wild West – a lawless kingdom that serves society no good. This is an argument that is far from the truth.

Let’s start with Texas to decompress. The state of Texas has one of the strictest betting and gambling laws in the United States. The laws are so broad that even fantasy sports can be construed as gambling. This tells me that the country historically called the Wild West can be very strict. Relevance here? Texas also has some of the most progressive crypto laws.

To use a cliché, even the Wild West has clearly differentiated cryptos from gambling.

The Texas Virtual Currency Bill grants legal status to cryptos, subjects service providers to existing state laws, and grants rights to investors. For example, if a person owns 0.33 bitcoin, then by law he has rights to 33% of a single bitcoin.

Since then, state-chartered banks in Texas have been allowed to provide crypto custody services to their customers, provided the bank has adequate protocols in place to manage the risks.

Regulators elsewhere have also recognized cryptos as an asset class, underlying the utility and adoption of the blockchain network. It is no more speculative than, say, investing in a startup.

This explains the growing institutional investment in cryptos. From GrayScale Investments to JP Morgan, investment firms are increasingly offering their clients access to custom crypto funds – GrayScale alone has over $40 billion in crypto assets. Consulting firm PwC estimates that by 2020, the share of crypto hedge funds will have increased by at least $20 million in assets from 35% to 46%.

Betting, on the other hand, is simply a game of chance – a bet on one of many possible outcomes. What is the probability that horse A wins race 1, horse B finishes second in race 2, and horse 3 wins race 3? Even professional gamblers are bound by fate, even if they use mathematical models to help them.

It is not the same as investing. Are there risks associated with investing in stocks? Yes, but informed decisions and transparency can reduce this. But does that make betting on stock trading? No.

In fact, stock markets used to be likened to back betting when our knowledge of the subject was limited. Satta Bazaar, as it used to be called. The perception of exchanges as gambling circles was so widespread that in 1951 the AD Gorwala Commission had to go into great detail to distinguish measured speculation from gambling. Today, after liberalization, it is advisable to invest in equities.

Cryptos are in the same phase of adoption today as stocks were back then; and we again mistakenly compare a new asset class with betting.

Cryptos are to the blockchain what stocks are to public companies. The US Securities and Exchange Commission considers many crypto tokens to be securities, with the notable exception of Bitcoin.

Some crypto assets are considered commodities. Bitcoin is defined as a private currency in some jurisdictions and a simple asset in most others.

That is, essentially crypto assets are distinct from purely speculative betting. Then there is the matter of crypto use cases, from the immersive internet experience of the Metaverse to the shared and open internet of Web3.

Still, the tax provisions India has enacted for crypto assets are similar to betting. A misreading of market volatility may explain this. But the volatility is a function of the stage and the fast-growing acceptance rate. It’s not by design. According to Chainalysis, a blockchain analytics firm, the Indian crypto market is estimated to have grown by 641% by 2021. As the ecosystem grows and matures, the volatility would decrease.

The immediate need is a regulatory framework that protects investors and standardizes compliance and transparency standards for service providers. Significant efforts must also be made to train investors.

To draw from the report of the Gorwala Commission: The essence of regulation is to control speculation, and the essence of control speculation is to limit it to the right sphere, to the right people, and to the right type and volume of transactions.

This is the path the West and the Wild West are taking. Hopefully, India will also follow suit with a comprehensive and favorable regulatory framework.

(The author is co-founder and CEO, CoinSwitch)

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