How does tokenisation work?

Over the past few months, the cryptocurrency world has seen a sharp decline in value because of sell-offs. In the very recent past, one of the largest crypto exchanges, FTX, saw itself reduced to filing bankruptcy. There are news reports of potential wrongdoing by the operators of the exchange but it points to the fact the world of cryptocurrencies is still the wild-west when compared to other regulated entities like the stock market. As a consequence of this fall, Changpeng Zhao, CEO of the largest cryptocurrency exchange Binance recently said, “We’re in a new industry, we’ve seen in the past week, things go crazy in the industry. We do need some regulations, we do need to do this properly, and we do need to do this in a stable way. I think the industry collectively has a role to protect consumers, to protect everybody. So it’s not just regulators. Regulators have a role but it’s not 100% their responsibility.”

There is a good reason for Zhao saying this. Currently, while cryptocurrencies have high recognition among the general public, it is still a fairly niche sector that is highly speculative with extremely limited acceptance among the general public and merchants. Worldline Global has a position paper looking at what it would take for higher acceptance of cryptocurrencies. At the end of the day, the under-tone is that regulating an ecosystem is beneficial for multiple reasons which include safety (less fraud), and predictability which all add to the largest benefit which is confidence in the system and subsequent higher acceptance by the general public. As far as India is concerned, this lack of regulation and lack of transparency has been one of the primary reasons, among many others, for the regulator and government to demur on cryptocurrencies.

In the same vein, with reference to the Indian payments ecosystem, the Reserve Bank of India (RBI) appears to be following a similar pattern. In their ‘Guidelines on Regulation of Payment Aggregators and Payment Gateways’ dated March 17, 2020

• Licenses are currently being given for companies involved in online transactions
• The RBI has been looking at various parameters before granting licenses; capital requirements, governance, security, fraud prevention and risk management framework, KYC/AML regulations, among others.

The RBI has also recently spoken about granting licenses to operators of in-store payments systems (POS, QR etc.) which will likely involve scrutinizing similar parameters as online operators. The eventual outcome which the RBI from these regulations is to make consumers confident of the system so that they use the digital payments system often and more importantly, get new consumers into the digital payments ecosystem.

While there may be costs of regulation on companies, the net benefit of these regulations, especially if well thought out, will have a greater advantage for the same companies as well as for the larger ecosystem. Successful regulation prevents market failure, promotes macroeconomic stability, protects consumers, and mitigates the effects of financial failures on the real economy. Similar progressive regulation in the larger financial space has been responsible for much of the stable financial ecosystem in India.

Know more about the trends in the payment industry and the digital payments scenario in India through our quarterly India Digital Payments Reports.