The last few days have seen extraordinary volatility when it comes to the values of cryptocurrencies on multiple exchanges across the world. Although the champions of the cause have stated that this drop is not unprecedented and, in the past, cryptocurrencies have recovered from similar falls, the bigger question is should reliance just be placed on the historical performance or should checks, and balances be introduced in the system?
The above issue has become more pertinent in India as increasingly, citizens are attracted to crypto-trading as investment options as the volumes continue to increase on a daily basis.
Let’s look at the government’s efforts in trying to regularise this market, the predicaments it faces and the ideal policy that may suit a democracy like ours.
The Current Policy
While cryptocurrencies are not illegal, India does not have a regulatory framework to govern cryptocurrencies. In the past, the Reserve Bank of India (RBI) and the Centre have warned against the potential misuse of the technology and have displayed proclivities towards a blanket ban on the use of cryptocurrencies in India.
The RBI had issued a circular preventing banks from doing business with crypto-trading platforms but that was stuck down by the Supreme Court. Thereafter, we have not seen any other regulation announced by the government.
In February, the RBI Governor announced that the RBI was working on its own digital currency. In March, Finance Minister Nirmala Sitharaman said that all windows on cryptocurrencies will not be closed. All in all, the future of the legality of cryptocurrency in India is uncertain in light of the inconsistent positions taken by central authorities so far.
The crypto asset market in India is worth $15 billion. As per a recent analysis, the Indian crypto community may consist of over 6 million users or approx. 0.5 percent of the population. Stakeholders in the industry have made a strong case for regulation for reasons including — lack of clear classification of cryptocurrency in India, need for disclosure to generate investor awareness, need for creating an information infrastructure, reducing cyber security risk, business uncertainty, exposure to avoidable frauds and to address money laundering concerns.
A regulatory framework for crypto assets in India could take two possible approaches.
For the first, suitable amendments may be introduced in the existing legal framework. This would entail making appropriate amendments in the existing laws and regulations. For example, the Information Technology Act, 2000 should be amended to include crypto assets in the definition of ‘data’, the Payment and Settlement Systems Act, 2007 should include systems enabling crypto asset operations under the definition of ‘payment systems’. Similarly, SEBI should recognise digital assets as securities and laws applicable to stock exchanges should also be made applicable to digital asset exchanges.
Under the Prevention of Money Laundering Act, 2002, the definition of ‘reporting entity’ should include digital asset exchanges. This elaborate process would also include making relevant amendments to several other laws including inter-alia the Indian Penal Code, the Indian Contract Act, tax laws and FEMA Regulations.
Alternatively, the government may also introduce an exhaustive code — that is a separate dedicated legislation to govern the crypto assets in India with an independent regulatory body at the central level to manage the market in India. The code must take cognisance of the potential obstacles and plausible dangers in dealing in cryptocurrency in India — for example, hacking of exchanges, fraud, money laundering, tax evasion, trade manipulation and other illicit activities, and make appropriate laws and regulations to deter the same.
In the meantime, the government may also consider issuing notifications/guidelines to existing market participants to ensure that safeguards are immediately put in place.
The instantaneous need for regulation cannot be denied — with introduction of appropriate compliances, disclosures and applicable penalties for non-compliance, the market players in the crypto industry shall be more at ease and be able to operate to their full potential.India should not fall behind other countries by delaying the introduction of policies and regulations in the crypto space. Creating accountability and instilling trust in the crypto asset market by way of regulation is the need of the hour and the responsibility of the government. Stakeholders are keenly awaiting a definitive response.