Absence of Indian Crypto Custody Solutions - Increasing risk for Indian users
New Delhi : The rise of crypto assets has led to the development of various tools for managing digital assets. Among these tools, wallets, and custody solutions play crucial roles in ensuring the security and accessibility of crypto assets. As crypto adoption continues to gain momentum in India, it becomes increasingly important to focus on secure and reliable mechanisms for the custody of crypto wallets. Given that digital assets are inherently susceptible to hacking, loss of private keys, and other forms of digital theft, a well-structured framework for securing crypto wallets must be established.
A crypto wallet is a hardware or software that lets users transmit, receive, and store cryptocurrency assets by controlling cryptographic keys instead of actual currencies. Each wallet has a private key, which functions similarly to a password, for allowing transactions, and a public key, which functions similarly to a bank account number for receiving payments. These keys need to be properly secured. These wallets are categorized as hot wallets (internet-connected and convenient but less secure), cold wallets (offline and more secure, like Ledger and Trezor), custodial wallets (managed by third parties like exchanges, offering convenience but requiring trust), and non-custodial wallets (where users control their private keys, enhancing security but adding responsibility).
Despite India leading the world in grassroots crypto adoption, there is a shocking lack of domestic crypto wallets and custody solution providers. Even more alarming is the absence of clear guidelines governing these providers, leaving their responsibilities undefined and accountability unaddressed. This scenario is comparable to allowing a depository solution provider in the traditional capital market to operate without any regulatory authorization—this could lead to catastrophic consequences, which is why established rules and regulations for depository institutions exist.
Custodianship must be decentralized wherever possible, empowering users with full control over their assets through self-custody solutions, such as hardware wallets and cold storage. These methods deliver significantly better protection compared to the centralized exchanges that are vulnerable to hacks or even shutdowns. Moreover, security can be enhanced through features such as multi-signature wallets, multi-factor authentication (MFA), and end-to-end encryption. These are not optional; they are essential to ensuring that crypto owners retain full ownership and control over their assets. The recent cyberattacks on prominent crypto exchanges have starkly revealed the failures and risks associated with inadequate custody solutions, with customers paying the price for these shortcomings.
The lack of proper regulations poses a substantial threat, pushing Indian investors and businesses to seek offshore custody services for their crypto assets. This not only leads to diminished oversight and increased security risks but also capital outflows that harm the national economy. The government must establish clear guidelines for crypto custody, creating a secure and transparent environment where both investors and businesses can access regulated and compliant solutions. Such measures are essential from both a regulatory standpoint and a consumer protection perspective.
To stimulate the growth of domestic custody service providers, the government should implement incentives such as tax breaks, regulatory sandboxes, and government-backed compliance certifications. This will not only keep digital assets within Indian borders but also invigorate the local blockchain industry, generating jobs and fostering technological progress. Strong domestic custody regulations will bolster consumer confidence, ensuring that their assets are safeguarded within the framework of Indian law and minimizing risks related to fraud or mismanagement by unregulated foreign entities.
Furthermore, for law enforcement authorities (LEAs) to effectively tackle financial crimes, fraud, and illegal activities involving virtual digital assets (VDAs), it is essential to have crypto custody solutions within Indian jurisdiction. Currently, many cryptocurrency assets are held on foreign platforms due to a lack of regulatory clarity, complicating LEAs' ability to gather critical information on cases involving money laundering, cyber fraud, or terrorism financing. A robust domestic custody framework would enable swift investigations and asset recoveries by ensuring that LEAs have quick access to transactional data when required. Keeping VDAs within Indian jurisdiction is vital to preventing regulatory arbitrage—a tactic that allows corrupt individuals to exploit international law loopholes to avoid accountability.
To foster a safe, legal, and innovative crypto economy in India, it is essential to adopt a balanced strategy that marries clear legislation with stringent financial and operational oversight. This is not just a recommendation; it is a necessity for the protection of consumers and the integrity of the national economy.
