An Indian supreme court advocate has shared some thoughts on the kind of cryptocurrency regulation India can benefit from. The right regulatory framework “would ensure transparency, oversight and accountability,” but a “one size fits all” regulation would be a mistake, she explains. Meanwhile, the Indian crypto community and industry bodies have urged the central bank to allow crypto businesses to participate in its new regulatory sandbox.
How India Could Regulate the Crypto Industry
The regulatory framework for cryptocurrency in India is being finalized by an interministerial panel headed by Subhash Chandra Garg, Secretary of Department of Economic Affairs. The media recently reported that a draft bill has been circulating among relevant ministries for discussion. In an interview with the Economic Times CIO, N.S. Nappinai, a supreme court advocate and cyber law specialist, shared her thoughts on cryptocurrency regulation in India. She said:
Regulation would ensure transparency, oversight and accountability. The onus or burden on the government may be shifted to exchanges or other platforms offering virtual currencies or trading thereon.
“Explicit terms of functioning for such exchanges can regulate the kinds of virtual currencies that may be traded, the modes and methods of reporting, the restrictions on trading (including on valuation spurts etc.,) and also investor protection provisions can be incorporated,” the advocate suggested.
‘One Size Fits All’ Regulation Undesirable
There have been reports that the Indian government is both considering banning some cryptocurrencies and regulating some approved ones. The Economic Times recently reported on the “Banning of Cryptocurrencies and Regulation of Official Digital Currencies Bill 2019,” citing an unnamed government official claiming to know the details of the bill. Commenting on the possibility of a ban on cryptocurrencies, Nappinai told the publication that any “‘one size fits all’ option may be a huge mistake,” elaborating:
There is also debate on whether cryptocurrency can be banned at all. After all how would the government enforce it without infringing on the privacy of all. Any form of electronic device may be used to store cryptocurrency.
Since there has not been an official announcement by the government regarding the aforementioned bill or any other cryptocurrency bills, traders in India are undeterred by the rumor and continue to trade, as evident by rising volumes at local exchanges. “The report did not really affect volumes at all,” Nischal Shetty, CEO of local exchange Wazirx, told news.Bitcoin.com. “Unless we hear something concrete from our finance department I don’t think it’s going to affect existing traders.”
India’s Crypto Regulatory Attempt
In addition to several cryptocurrency-related warnings, the central bank has banned financial institutions from providing services to crypto businesses, as outlined in its circular issued in April last year. Banks subsequently closed accounts of crypto exchanges, forcing them to stop providing fiat support to their users. The advocate asserted:
By closing out the banking route, the Indian government merely pushed the entire market into the cash system thereby making it more opaque and impossible to track or trace.
Some startups are affected more than others. Zebpay, formerly one of the largest crypto exchanges in India, for example, shut down its exchange operations in the country in September last year due to the banking problem. Another crypto exchange, Coindelta, closed down in March for the same reason after the supreme court delayed hearing about the banking restriction. Coinome, a crypto exchange backed by online payment gateway Billdesk, has also halted operations due to regulatory reasons.
Last month, Cambridge University’s Centre for Alternative Finance released a report entitled “Global Cryptoasset Regulatory Landscape Study,” which discusses the regulatory frameworks of 23 countries including India. Hatim Hussain, one of the authors of the report shared some thoughts with news.Bitcoin.com. “Banning sale, purchase and issuance of all forms of cryptocurrencies is an extreme step,” he commented:
It is likely the bill will take some time to become law, even if the government decides to introduce the same in the Lok Sabha, and certainly not before the next supreme court hearing on the issue in July, which might provide some clarity on the issue.
The Indian supreme court is set to hear the crypto case on July 23 after repeatedly postponing it since last year. The court is expected to address two issues: the country’s regulatory framework for cryptocurrency and the crypto banking ban by the central bank. At press time, no cryptocurrency bill has been introduced for a first reading in Lok Sabha.
Hussain further explained to news.Bitcoin.com: “It is possible to regulate transactions in cryptocurrencies, if they constitute money laundering, under PMLA [Prevention of Money Laundering] Act. Nevertheless, the effective application of PMLA to illegal transactions in cryptocurrencies is a grey area since it is unclear whether the reporting obligations prescribed under Chapter IV (Obligations of Banking Companies, Financial Institutions and Intermediaries) of PMLA Act would extend to wallet operators or bitcoin exchanges or any third party bitcoin services.” He additionally detailed:
Further clarity (by way of amendment or otherwise) is indeed required before the government can effectively regulate illegal cryptocurrency transactions under PMLA. Amendment to PMLA is certainly a faster process than introducing a new legislation, but has to meet the rigours of Parliamentary approvals in any case.
India Learning From Other Countries
The Indian government has been observing how other countries regulate cryptocurrencies. The Securities and Exchange Board of India, for example, revealed in its annual report 2017-18 that it sent some officials to Japan, the U.K., and Switzerland to study how the regulators there deal with cryptocurrencies and initial coin offerings. In addition, India is a G20 country and has agreed to follow international standards on crypto assets such as the one developed by the Financial Action Task Force (FATF). According to the country’s Ministry of Finance, the Department of Revenue has been helping the FATF develop international standards on crypto assets.
Nappinai noted that many countries such as the U.S. have chosen to regulate crypto assets instead of banning them. “With every change that USA has brought about, other countries including Singapore and Japan have followed suit,” she opined:
India has many options to draw from but it has stopped short of taking a definitive call.
“India’s population and young demographic being a substantial part thereof is reason enough for the government to take a definitive stance,” the advocate told the news outlet. “Else a large young risk intensive population may have already entered the crypto-asset market and may then be left adrift with no remedies or solutions.”
RBI’s Regulatory Sandbox
The Reserve Bank of India (RBI) published a draft framework entitled “Draft Enabling Framework for Regulatory Sandbox” in April, leaving out businesses involving cryptocurrency, crypto asset services, crypto trading, crypto investing, and settling in crypto assets. It also excludes initial coin offerings and any products or services which have been banned by the Indian government. However, businesses dealing with smart contracts and blockchain technologies are allowed to participate in the sandbox.
Responding to the RBI’s request for public comments on the draft framework, industry lobby groups and founders of crypto startups have asked the central bank to reconsider its rules and allow businesses dealing with crypto assets to participate in its proposed regulatory sandbox, the Economic Times reported last week.
The National Association of Software and Services Companies (Nasscom), a nonprofit trade association of the Indian information technology and business process outsourcing industries, is among those that have urged the central bank to consider allowing crypto companies to participate in its regulatory sandbox. Among Nasscom’s initiatives listed on its website is “Liaisons with government and industry to influence a favourable policy framework.” In February, the association released a report calling for regulatory improvements and clarity in areas such as cryptocurrency.
Referencing how other countries have permitted crypto businesses in their regulatory sandboxes, the trade body asserted that including these businesses could help the central bank “develop a better understanding of the risks,” the publication wrote. “The decision to keep cryptocurrencies, trading of cryptocurrencies and initial coin offerings out of the purview of the regulatory sandbox is still not clear,” Nasscom remarked, adding:
Since cryptocoins and tokens are an important component of the blockchain technology, the draft regulations appear to exclude testing of smart contracts and other approved blockchain technology under the sandbox.
Payments Council of India (PCI), the payments industry lobby group, has also urged the RBI to include cryptocurrency businesses in its regulatory sandbox, according to the Economic Times. Naveen Surya, chairman emeritus of PCI, believes that “Since there is no outright ban on cryptocurrency technology, it should form part of the sandbox,” the news outlet conveyed and quoted him as saying:
Ideally, they shouldn’t have such large exclusions … The boundaries can’t be defined right away.
“The discussion has been on how an open framework can be created instead of a subset of existing laws, because then we wouldn’t be achieving the innovation objective,” he described.
While India is leaving out crypto businesses from its regulatory sandbox initiative, Bahrain is trying to attract them to its crypto-friendly environment. In March, the Bahrain Economic Development Board invited Indian companies to set up base in its country. The Central Bank of Bahrain recently revealed that half of the companies it has approved for the regulatory sandbox are crypto service providers including exchanges.
The Right Regulation
Nappinai recognizes the importance of regulation. “Whilst technology may grow even exponentially without regulation or restraint, it reaches the tipping point when it needs the support of regulation to grow,” she told the Economic Times. However, the advocate clarified, “we are referring to effective and simple regulation to meet the requirement and not complex structures born out of fear,” emphasizing:
India should really look clinically at formulating simple regulations to meet its unique socio-economic milieu and lend support for developing the technology.
“With respect to crypto-assets, regulation would ensure transparency and certainty to both the business and investor stakeholders or at least put to rest this vertical as an investment option,” she concluded.