Should India Divide Cryptocurrencies Into Multiple Categories?

For last couple of days, the crypto related media is abuzz by the news of Indian Finance Ministry's meeting with an international law firm for suggestions for a regulatory framework to regulate cryptocurrencies in India.

Actually, the law firm Nishith Desai Associates, is representing IAMAI in the Supreme Court against the RBI for banking crypto ban case.

This law firm has earlier submitted a report for measures on taking a self-regulatory approach in July, 2017 to a previous government committee headed by Dinesh Sharma. That report was never made public and it's proposal appears to be rejected.

So last December, Nishith Desai Associates submitted yet another paper to the current committee headed by Subhash Chandra Garg. Earlier this month, Finance Ministry invited them to present their recommendations where they explained all their suggestions mentioned in the paper. This was recently made public on 28th January, 2019.

This opportunity was used to explain the importance of blockchain technology to the Garg panel and it also mentioned that it's being successfully used by a West Bengal district for an implementation relating to birth certificates. Although that is a non-financial use case of the blockchain, it uses a crypto token for it. Thus it emphasized the necessity for cryptocurrencies too.

However, I don't find anything new in this paper except the suggestion of dividing crypto assets into three categories:

1. Payment Tokens: Almost exclusively used for exchanging or transferring value.
2. Security Tokens: Representing rights in physical property, company ownership (shares), or other underlying assets.
3. Utility Tokens: Those which grant right of access to a digital product or service.

I think this division has been proposed to make it easier for regulatory purpose by existing regulatory agencies and laws. E.g. Payment Tokens can be regulated by RBI or Security Tokens can be regulated by SEBI.

However, I don't think such a division is necessary. As the technology evolves, purpose of tokens will overlap across categories. Same token may be used for all three purposes depending on the user's intention of using it for a particular use case.

So wouldn't it be better to create a dedicated Cell to monitor and overlook digital assets for its better regulations ...just like Cyber Cells came into existence after internet era?

The firm also recommended to make KYC & AML norms more stringent and fine tuning of I.T. Act and Taxation structure.

To me, it looks like this firm is actually representing crypto-exchanges (or IAMAI) as an out-of-court settlement deal. Where is the need to negotiate with the government when the matter is sub-judice? Why will a reputed firm give free unsolicited recommendations to Indian Government?

Government's interest in meeting with this firm also shows that it is on the defensive foot regarding the case in Supreme Court. If Government really wanted suggestions, it could have invited it from the general public. If the government panel was looking for experts, it could have invited any other expert who was not a party in the court case.

Well, whatever the case, it looks almost certain that blockchain industry is going to be regulated soon in India.