Memo from the Wild West-Crypto is an asset class

Aniket Jain 2022-05-23 10:05

The Finance Bill 2022 was the first legislation in India to define crypto assets. “Virtual digital assets”, it said, are—I’m condensing here—digital representation of value exchanged with the promise or representation of having inherent value, or functions as a store of value or a unit of account.

Some, however, have a tendency to refer to the crypto environment as the Wild West—a lawless region that is harmful to society. This is an argument that is far from the truth.

Let’s start with Texas to unpack. Texas has one of the most stringent anti-betting and anti-gambling legislation in the country. Because the laws are so wide, even fantasy sports can be considered gambling.

This tells me that the country formerly known as the Wild West might be incredibly strict. What’s the point? Texas also has some of the most advanced cryptocurrency legislation.

Some, however, have a tendency to refer to the crypto environment as the Wild West—a lawless region that is harmful to society. This is an argument that is far from the truth.

A Through explanations The Matter

This tells me that the country formerly known as the Wild West might be incredibly strict. What’s the point? Texas also has some of the most advanced cryptocurrency legislation.

The Texas Virtual Currency Bill provides legal status to cryptos, subjects service providers to existing commercial laws of the state, and accords rights to investors. For instance, under the law, if a person has 0.33 bitcoin, they then have rights over 33% of a single bitcoin.

Since then, Texas state-chartered banks were allowed to provide customers with crypto asset custody services, so long as the bank puts in place adequate protocols to manage risks.

Regulators elsewhere, too, have recognized cryptos as an asset class, with its underlying value being the utility and uptake of the blockchain network. This is no more speculative than, say, an investment in a startup.

This explains the growing institutional investments in cryptos. From GrayScale Investments to JP Morgan, investment firms are increasingly providing their clients with access to bespoke crypto funds—GrayScale, alone, holds over $40 billion in crypto assets. Consulting firm PwC estimates that in 2020, the share of crypto hedge funds with at least $20 million in assets increased from 35% to 46%.

Betting, in contrast, is simply a game of probability—a wager on one of the numerous possible conclusions. What is the probability of Horse A winning Race 1, Horse B coming second in Race 2, and Horse 3 winning Race 3? Even professional bettors are bound to fate, even if they deploy mathematical modeling to their aid.

The immediate need is a regulatory framework that protects investors and standardized compliance and transparency norms for service providers. A considerable effort should also be made to educate investors.

Conclusion

To borrow from the Gorwala Committee report, the essence of the regulations is to control speculation, and the crux of the control of the speculation is its confinement to the right sphere, the right persons, and the right type and volume of operations.

That’s the path the West—and the Wild West—are taking. Hopefully, India, too, would follow with a comprehensive and conducive regulatory framework.

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