Investments in crypto, is it a catalyst or cataclysm

The cryptocurrency world, born from the cypherpunk dream of circumventing traditional financial gatekeepers and government oversight, finds itself in a profound and deeply ironic moment. With each passing day, the US administration isn’t just tolerating crypto; it’s actively formalising and legalising it, providing the very structure its creators sought to avoid. This unexpected embrace, far from stifling the industry, is fueling a new wave of institutional euphoria and mainstream acceptance, fundamentally reshaping crypto’s trajectory and granting it fresh legs for growth. What many early proponents aimed to subvertironically became the wing of the dominant power.

Bitcoin, the cryptocurrencies’ genesis block famously contained the headline decrying bank bailouts. The repulsion from the fiat currency with foundational thesis on decentralization, privacy, and freedom from government-controlled monetary systems. Yet, the current surge in legitimacy and capital inflow is undeniably abetted by the deliberate U.S. government policy. This isn’t accidental tolerance but a calculated, sometimes contentious, move to bring the unruly asset class within the regulatory perimeter.

The pivotal shift began not with sweeping legislation, but with a crucial, though reluctant regulatory nod of introducing futures-based Bitcoin ETFs. This provided a familiar, regulated wrapper for institutional investors wary of direct crypto exposure. It was a signal that the SEC, albeit cautiously, was opening a door. The trickle of institutional capital began.However, the true watershed moment arrived with the long-awaited approval of spot Bitcoin ETFs in early 2024. This wasn’t just another product, it was a game-changer. Suddenly, major Wall Street players like BlackRock, Fidelity, and VanEck could offer funds holding the actual Bitcoin, traded on traditional exchanges.

The GENIUS Act not only legitimised the digital tokens but mandated stablecoin issuers to maintain reserves backing outstanding payment stable coins on at least one-on-one basis. The reserves may consist of certain assets including US dollars, federal reserve notes, funds held at certain insured or regulated depository institutions, short-term treasuries, reverse repo agreements and money market funds. The law while providing leeway to the stablecoins to enter the mainstream has also addressed a consistent market for the dollar assets, which is being increasingly shunned by the foreign sovereigns.

The legislation has brought clarity on the asset classification, regulatory framework while streamlining anti-money laundering (AML) and Know Your Customer (KYC) guidelines. This wave of regulation, even if incomplete, grants the industry a form of ‘pseudo-legitimacy’. The US is charging ahead with these policy formulations even as the rest of the world is in a ‘wait-and-watch’ mode.

The EU while a pioneer in MiCA (Markets in Crypto-Assets Regulation) is restrictive and complex in implementation. The UK and Switzerland are actively working on the framework but still finalising the details. Singapore and UAE have built progressive crypto-friendly regulations to foster innovation while enforcing investor protection. The other major economies like China and India are often maintained stricter stances or even outright bans, creating a fragmented global landscape.So, with this backdrop, would an investment in cryptos make sense for investors?

Post pandemic, increasingly Indians have participated in crypto trading extending beyond the urban areas into smaller cities, primarily driven by the younger population. Though, many of burnt their hands with the tokens beyond the blue-chips (like Bitcoin, Ethereum, etc.) the lure for quick returns has allowed to continue to pursue. Domestic crypto exchanges like CoinDCX, ZebPay are legally allowed to operate with FIU-IND (Financial Intelligence Unit) along with the basic KYC compliance. Lack of legislation puts them beyond the purview of SEBI, RBI currently while a flat 30 per cent tax plus applicable surcharge and 4 per centcess is levied over the gains made in these digital assets. Also, a 1 per cent TDS is automatically deducted by the Indian exchanges exceeding Rs. 10K.

Stable coins are gaining currency thanks to the recent US legislations, are increasingly finding interest among the 100 million crypto users in India. Though better than the ‘rug-pulls’ of ICO (Initial Coin Offering) frenzy of ’17, the crypto heists are now becoming a menace. Two Indian exchanges were breached with WazirX reportedly loosing $230mn and recently CoinDCX lost about $44mn. Despite the cybersecurity breaches and lack of regulation, the historical returns (though limited period of history) aren’t allowing to investors to ignore this burgeoning asset class.

(The author is a partner at “Wealocity Analytics”, a SEBI registered Research Analyst firm and could be reached at info@wealocityanalytics.com)