Two events in the last week of December reignited the debate that dominated large parts of 2021, one that will keep resurfacing in the new year as well until resolved.
How will India regulate a booming cryptocurrency market and the growing popularity of digital assets such as non-fungible tokens (NFTs), which continue to operate in a grey area?
RBI is worried
On December 29, the Reserve Bank of India’s Financial Stability Report (FSR) flagged concerns about private cryptocurrencies, saying they pose immediate risks to customer protection, anti-money laundering efforts and combating the financing of terrorism.
The proliferation of private cryptocurrencies across the globe had sensitised regulators and governments to the associated risks, the report said.
Private cryptocurencies are also prone to frauds and to extreme price volatility, given their highly speculative nature, the RBI, which has been vocal in its reservations about virtual currency, said.
Long-term concerns relate to capital flow management, financial and macro-economic stability, monetary policy transmission and currency substitution.
The RBI report, quoting the intergovernmental Financial Action Task Force (FATF), said the virtual asset ecosystem was seeing the rise of Anonymity-Enhanced Cryptocurrencies, mixers and tumblers, decentralised platforms and exchanges, privacy wallets, and other types of products and services that enable or allow for reduced transparency and increased obfuscation of financial flows.
Going by this report, new illicit financing typologies continue to emerge, including the increasing use of virtual-to-virtual layering schemes that attempt to further muddy transactions in a comparatively easy, cheap and anonymous manner.
Also read: DGGI detects Rs 70-crore tax evasion after crackdown on crypto exchanges
Tax evasion
Almost confirming some of the concerns highlighted in the RBI report, a day later, on December 30, the goods and services tax (GST) department said it recovered Rs 49.20 crore in cash for alleged tax evasion by WazirX, one of the largest cryptocurrency exchanges in India.
The department detected a GST evasion of Rs 40.5 crore. The exchange allowed trading in rupee or WRX coins, the exchange’s cryptocurrency. WRX coins had to be purchased from the WazirX platform, which is backed by Binance Investments, a Seychelles-based entity, the tax department said.
The investigation revealed that WazirX collected money from the commission as trading fees, deposit fees and withdrawal fees but paid GST only on commission earned in rupee and not in WRX. An investigation is on.
The crypto industry also faces money-laundering charges. In November, the Times of India reported that the Enforcement Directorate had unearthed illegal transactions worth Rs 4,000 crore where money was laundered through cryptos in one year.
None of the transactions were available on the blockchain for any audit or investigation and clients could transfer any amount to anyone irrespective of location and nationality without any documentation, thus facilitating laundering, the report quoted ED’s notice to one of the crypto exchanges in India as saying.
Crypto-backers have often touted transparency offered by blockchain technology as the USP of virtual currencies.
The ED observations confirm the fears of the central bank. They also highlight why we need crypto regulations at the earliest.
The government is yet to introduce the much-awaited cryptocurrency bill in India.
At the same time, despite repeated warnings, new investors are putting their hard-earned money in digital assets even though there is no regulatory framework. Let 2022 be the year when India clears up the crypto fog.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
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