September 25, 2022

Finance & Economy

Let's Talk About Investment

Memo from the Wild West-Crypto is an asset class

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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.

Yet, there is a predisposition among some to term the crypto ecosystem as the Wild West—a lawless realm of no good to society. This is an argument far removed from the truth.

To unpack, let’s start with Texas. The state of Texas has one of the strictest laws against betting and gambling in the United States. The laws are so broad that even fantasy sports can be interpreted as gambling. This tells me the land historically referred to as the Wild West can be very stringent. The relevance here? Texas also has some of the most progressive laws on cryptos.

To borrow a cliche, even the Wild West has clearly differentiated cryptos from gambling.

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 recognised 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 its 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 modelling to their aid.

This is not the same as investments. Are there risks involved in investing in stocks? Yes, but informed decisions and transparency can mitigate that. But does that make equity trading betting? No.

In fact, equity markets were once compared to betting in the days when our subject knowledge was limited. Satta bazaar, it used to be called. The perception of stock exchanges as betting rings was so rife, the A.D. Gorwala Committee, 1951, had to go in detail to distinguish measured speculation from gambling. Today, post-liberalization, it is advisable to invest in equities.

Cryptos are in the same adoption phase today as equities were then; and we are once again erroneously comparing a new asset class to betting.

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

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

Which is to say, fundamentally, crypto assets are distinct from purely speculative bets. Then there is the matter of use-cases of cryptos—from the immersive internet experience of the metaverse to the shared and open internet of Web3.

Yet, the tax provisions India has set for crypto assets are comparable to betting. A misreading of the volatility in the market perhaps explains this. But the volatility is a function of the phase and the rapidly growing adoption rate. It’s not by design. India’s crypto market is estimated to have expanded by 641% in 2021, according to Chainalysis, a blockchain analytics firm. As the ecosystem develops and matures, the volatility would narrow down.

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

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.

(The writer is Co-founder and CEO, CoinSwitch)

https://www.deccanherald.com/business/business-news/memo-from-the-wild-west-crypto-is-an-asset-class-1111572.html