With millions of Indians already invested in cryptocurrencies and possibly as many trying to assess its scope and risks before taking the plunge, there is a lot of interest in the upcoming Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, slated for discussion in the ongoing winter session of Parliament. The Bill is expected to include accountability and transparency standards for crypto-trading exchanges, with many hoping the digital tokens will be treated as assets like equities or real estate.
It’s near-certain that private cryptocurrencies, like Bitcoin or Ethereum, will not be recognised as legal tender in India. On November 29, Union finance minister Nirmala Sitharaman told the Lok Sabha that the Centre had no plans to recognise Bitcoin—the largest cryptocurrency by value—as a currency. Government sources say there are likely to be regulations against “misleading, over-promising and non-transparent” advertising in the sector, with measures to prevent cryptocurrencies from becoming “avenues for money laundering and terror financing”, as spokespersons for the government said following a meeting on the subject chaired by PM Narendra Modi in mid-November.
Industry members want cryptos to be recognised as an investment avenue. Ashish Singhal, founder and CEO of crypto exchange CoinSwitch, is hopeful that the regulations will focus on four areas: the classification of cryptos as a regulated asset class; a clear framework for the movement of funds to and from digital tokens; rigorous KYC (know your customer) processes for the industry; and an independent regulator for the sector. “India has an opportunity to be at the forefront of crypto innovation,” he says. “We [need] regulations that benefit us as a country.”
Former finance secretary Subhash Chandra Garg describes the cryptocurrency ecosystem as an ‘alternative digital economy’ that rests on blockchain-cryptography technology, in contrast with the centralised database technology underpinning the existing digital economy. He identifies three major components: Real goods and services (including music services, digital applications and decentralised financing services); digital assets (like NFTs, or non-fungible tokens); and the use of cryptos as currency. “The [government] needs to come up with policies for all the three facets,” he says.
India could draw from global examples, where regulations are in place to protect investors but still encourage investments in the underlying technology. In the US, each state has its own laws to regulate cryptocurrencies. Some exempt cryptocurrencies from state securities laws and money transmission statutes—in 2018, Ohio became the first state in that country to accept tax payments in Bitcoin, a decision that was later revoked. Other states, like Maryland and Hawaii, have issued warnings about investing in cryptos.
“India has an opportunity to be at the forefront of crypto innovation. We [need] regulations that benefit us as a country.”
– Ashish Singhal, founder and CEO, CoinSwitch
In the UK, crypto exchanges need to register with the Financial Conduct Authority, which regulates financial firms and markets. Consumers can buy and sell cryptocurrencies, but they are not classified as legal tender and the trading of cryptocurrency derivatives is banned. In the European Union, draft legislation—the Markets in Crypto-Assets Regulation framework, which treats cryptocurrencies as financial instruments—was released in September 2020, but is yet to be ratified. In contrast, earlier this year, China imposed a blanket ban on all private cryptocurrency transactions, which some say is to prevent competition to its highly regulated digital Yuan. While the views on regulations differ, the consensus seems to be that there is a need for better safeguards to protect investors.