It would not be an exaggeration to say that the policy discourse around proper regulation of a group of technologies that has been lumped together as “Web 3” is noisy and polarised. While India’s digital asset regulatory framework is a work-in-progress, we need a fair public debate. Digital assets, it has been argued, are not properly assets. The basic tenets of this ‘property theory’ can be summarized as follows:
Since digital assets have no underlying cash flow to reward their owners, they are not financial assets. And since they have no utility, they cannot be called goods. Calling them ‘digital assets’ is a misnomer because unlike other digital goods, such as car-hiring software or core banking systems, their electronic code has no utility. And finally, digital assets (such as bitcoin) are like a Ponzi scheme (where earlier investors get paid from funds coming in from later investors rather than organic capital creation through productive use of resources).
While the above critique of crypto assets is common, we must critically evaluate it in the context of public policy.
Wealth ‘creation’ as an organic process: markets, through institutional capital, give value to ‘things’ (‘res’ in Latin), and after a time, participants sell these things for capital appreciation. If you buy, they become property. The process of recognizing a particular ‘thing’ as a property is biological and not deterministic in the way it would be in the received narrative. A natural consequence of bottom-up evolution is that the utility of an asset is also a matter for the market to determine.
Art has emerged as an asset class. It has no cash flow, and no utility other than the aesthetic value it derives from Monet or Van Gogh. If the received narrative were true, then private equity and other institutional capital would not invest in the arts. Nevertheless, with an estimated $1.7 trillion value, it is one of the most preferred asset classes, as it preserves capital and often defies other asset-class trends. Gold is another example of a commodity that has no underlying cash flow, but is still considered an asset by people. While data shows that gold is a poor hedge against inflation, the yellow metal continues to hold sway with a large section of our population. In the same way, digital assets derive value from expectations of their future value, the volatility of which creates a market for these in the same way that varying views of trading performance drive the trading of listed stocks.
Do digital assets have utility?: Independent of what we suggested above, while cash flow or utility are not prerequisites to constitute an asset class, there are a number of digital assets that hold utility within their ecosystem. Are. For example, bitcoin, the canonical digital asset, serves as an incentive mechanism for validators/miners that solve the so-called double-spending problem. Similarly, XRP, another digital asset embedded in the XRP blockchain, serves as a settlement asset for cross-border payments and remittances. Banks in the US-Mexico corridor are using blockchain to transfer money from Miami to Guadalajara on behalf of expatriate Mexicans. Eth, another digital asset, has use cases in automating contingent contracts such as escrow arrangements and contingent sales. We could add to this list, but you get the point. Therefore, digital assets are called ‘assets’ even when utility matters.
Are digital assets a ‘Ponzi scheme’?: A brief primer on these before we get into the scope of the question. The US Securities and Exchange Commission (SEC) defines a Ponzi scheme as a scam, named after an Italian scammer, where existing investors are paid alleged returns from capital contributed by subsequent investors. is done. A bare perusal of the SEC website reveals that these plans can be designed around any number of assets. The first one, run by Charles Ponzi in the 1920s, was designed around postage stamps. Other examples include digital concierge machines and immigration bail bonds, astrology-based trading, among other things. The other defining characteristic of a Ponzi scheme is that it usually involves an individual, vested with fiduciary responsibilities, who violates these. Bernie Madoff, a fund manager in the US who was prosecuted for running a billion-dollar Ponzi scheme, was convicted in 2009.
In short, Ponzi schemes, like any investment fraud, may have any asset at the center of their deceptive webs, and in addition, involve a breach of fiduciary by a natural person to a class of investors to whom he owes a duty. Is. As we mentioned above, the SEC has prosecuted individuals for Ponzi schemes in traditional assets like bonds and equities. Thus, it is incorrect to characterize digital assets themselves as examples of Ponzi schemes. The primary about digital assets is not fraud. Of course, as with any asset, bad actors can always defraud investors by building a Ponzi scheme around any digital asset. But this is a matter of regulatory jurisdiction, and an appropriate regulator, aided by law enforcement, can prosecute these bad actors.
To conclude, policymakers and regulators would best serve India’s public interest by avoiding metaphors that do not stand the test of rigor in their criticism of digital assets and their properties.
Creating a regulatory template is a better way to reduce market failures and frauds, as it will protect young investors from taking their first risks in this space and reduce money-laundering risks from a lack of regulation to India’s financial health. Will also help preserve integrity.
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