MC EXCLUSIVE Crypto paper may flag tech benefits but will stop short of firm regulatory view

Cryptocurrencies in India have been subject to much scrutiny with the central bank in April 2018 prohibiting lenders and other financial intermediaries from dealing with crypto users or exchanges. However, this ban was struck down by the Supreme Court in 2020.

The government’s cautious approach to cryptocurrencies is likely to persist, with a discussion paper, the first draft of which would possibly be released in July, expected to underline potential technological benefits, especially for stablecoins, without taking a definitive stand on regulation, sources said.

Unlike others, stablecoins have an underlying asset, since it is pegged against a fiat currency or gold reserves. The most traded stablecoins currently include Tether (USDT) and USD Coin (USDC).

Stablecoins currently at $240.46 billion, represents 7.32 percent of the total cryptocurrency market cap, according to coincodex.com, which provides crypto market data, including real-time prices.

The working group led by department of economic affairs (DEA) officials may float the long-pending discussion paper in July, which will offer use-cases for certain cryptocurrencies without giving a firm direction on regulation, sources said.

“The paper will have use-cases, will take cues from the United States’ legislation…will initiate discussion, it will be an aggregation of facts. The paper can suggest different treatment for different crypto assets like bitcoin, stablecoins and the rest. One option that it could highlight is whether to regulate stablecoins as a part of global payments,” one of the source cited above said.

The finance ministry did not respond to an e-mail seeking comments on this matter. The story will be updated when the response comes in.

Crypto vs stablecoins

"While most cryptocurrencies do not have an underlying capital flow or associated liability, stablecoins do meet certain conditions," a second source said.

Cementing the country’s shift towards cryptocurrencies, the US Senate last week passed a bill to create a regulatory framework for dollar-pegged tokens stablecoins.

US President Donald Trump’s administration has been more supportive of cryptocurrencies than the previous regime, promising to make America the “crypto capital of the world”.

Edul Patel, co-founder and CEO of crypto exchange Mudrex highlighted the perks of stablecoins especially in view of India's large remittance haul. “India receives the largest remittances of $130 billion every year. The cost to send remittances including tax is approximately $3-5 billion. With stablecoins the cost will come down to $0.3-0.5b billion, leading to savings. This is a use case of stablecoins," Patel told Moneycontrol. “Moreover, stablecoins will be real time or instant like UPI. Even small amounts of remittances can be sent by stablecoins. With this use, India’s remittances can rise up to $200 billion.”

The second source said the group led by DEA will reach some arrangement. Since the global situation is changing, “the group’s approach has to change as well”, the source said.

Long-awaited paper

The discussion paper, which would only be a set of recommendations on the treatment of the asset class, would seek views from stakeholders. This is because India cannot, for long, avoid having a stated policy on cryptocurrencies — be it a ban or a partial regulation, sources said.

According to a third source, the direction of the paper would mostly be neutral. There won't be an implementation in this phase. “This is still the first paper that is coming out. Expect at least two to three more versions. Once a consultation paper is out, usually there will be two to three iterations of it after consultations with industry, experts, public, government,” the source said.

India’s decision to release a discussion paper came much before the shift in the US stance. The move came after G20 member countries, under India’s presidency in 2023, endorsed guidelines put forth by the International Monetary Fund (IMF) and the Financial Stability Board (FSB).

The roadmap for regulating crypto assets, proposed by the FSB and the IMF, was adopted by the G20 finance ministers and central bank governors in October 2023.

In March of that year, India had extended anti-money laundering and counter-terror financing standards to crypto-assets and intermediaries.

RBI still averse to crypto

While the government's stance on cryptocurrency may take into account the US’ shift in approach, the second source said the working group is still a divided house, with the Reserve Bank of India (RBI) in favour of highlighting the risks associated with cryptocurrencies.

“There is different point of views in the working group regarding regulating cryptocurrencies. Things might change globally but India has to understand the risks associated with the asset class, including stablecoins. Emerging markets can take a different view on cryptocurrencies,” the source said.

The RBI and the Securities and Exchange Board of India are among the regulators who are part of the group sharing inputs for the paper.

The RBI still firmly remains averse to regulating this asset class, including stablecoins citing concerns over a lack of an issuer, risks to consumer protection and influx of multiple currencies, the source said.

While Sebi has reportedly recommended that several regulators oversee trade in cryptocurrencies, indicating that at least some authorities in the country are open to allowing the use of private virtual assets.

"In my opinion, India must take a nuanced approach by segmenting the crypto ecosystem. Bitcoin, stablecoins, and altcoins each carry different use-cases and risk profiles, and treating them uniformly would be counterproductive," Patel said.

Cryptocurrencies in India have been subject to much scrutiny with the central bank in April 2018 prohibiting lenders and other financial intermediaries from dealing with crypto users or exchanges. However, this ban was struck down by the Supreme Court in 2020.

Though the government prepared a bill on cryptocurrencies in 2021 that is said to have proposed a ban on private cryptocurrencies, it has not been introduced.

Since 2023, an inter-ministerial group, led by the finance ministry, has been working on a discussion paper on cryptocurrency to outline the government’s stance.

Despite the lack of regulatory framework, crypto trading has been booming in India, especially  among the young and in small towns. India's crypto market is expected to grow to more than $15 billion in 2035 from $2.5 billion in 2024 at a compound annual growth rate of 18.5 percent, a Reuters report cited Kush Wadhwa, partner at consulting firm Grant Thornton Bharat, as saying.