Amidst the uncertainty around regulations governing India’s cryptocurrency industry, Indian banks and other stakeholders have adopted a cautious approach.
For example, despite the Supreme Court’s March 2020 ruling lifting the cryptocurrency trading ban, many Indian banks continued to cite a Reserve Bank of India circular banning banks from dealing in crypto. This prompted the country’s apex bank to, this week, issue a clarification on the invalidity of the circular given the SC’s ruling.
That’s why, for the fast-growing cryptocurrency industry to realise its potential in India, a clearly articulated regulatory framework governing crypto exchanges, startups, and assets in the country is crucial, says Rameesh Kailasam, CEO of IndiaTech.org – an industry body that was established by and represents India’s consumer internet startups, unicorns, and investors.
In an interaction with YS Founder and CEO Shradha Sharma, Rameesh further added,
“India has regretted missing the bus in terms of hardware and semiconductor chip manufacturing and other technology innovation. We shouldn’t miss the bus with crypto and blockchain. The industry is fast-growing and it should be embraced with checks and balances in place.”
IndiaTech.org recently published a whitepaper proposing a five-point policy framework to regulate the cryptocurrency industry in India that would help mitigate the risks associated with the space and, instead, foster growth and innovation.
Rameesh says, “There are well over 300 startups worldwide in the blockchain space, and yet Indian ones are getting only 0.2 percent of the pie in terms of global investments. Whenever there is innovation, regulators will play catch up, but they should not stifle innovation and investments in the space.”
Rameesh believes that with the right approach, India can, going forward, capitalise on the crypto industry’s potential and become a home to blockchain innovation that could impact the Indian economy similar to what IT services and the Internet economy has been able to achieve.
But to do that, the first step would be to embrace cryptocurrencies and define them as digital assets, not as currency. He explains,
“The fundamental point of concern is treating cryptocurrency as a form of currency. People argue against India having a currency that is not backed by any tangible assets. At IndiaTech.Org, our first recommendation to better regulate the cryptocurrency industry in India is to define cryptocurrencies as digital assets, not as currencies.”
The other steps, he adds, would be to introduce checks and balances around traceability and disclosures, tax regulations, a system to register homegrown crypto exchanges, and establish self-regulation or a code of conduct for the industry.
During the interview, Rameesh explained the five-point framework to define, introduce, enable, allow, and encourage necessary checks and balances for the industry and boost crypto adoption as well as blockchain innovation in the country.
The five-point framework comprises the following recommendations:
Definition and ownership
Define and recognise crypto assets as digital assets, not currencies, and introduce a system for registering local homegrown crypto exchanges in India.
Under this, IndiaTech.Org recommended India may seek to allow only Indian founders to operate such businesses.
“By doing so, India will save billions of dollars of revenues that may be payable to foreign exchanges. We recommend minimum ownership of 26 percent by Indian founders/entities in crypto exchanges, similar to the practice followed in the banking sector in India,” the whitepaper read.
Compliance, verification and reporting
Introduce sufficient checks and balances through well-defined reporting mechanisms and accounting standards to counter suspicious activities.
These include customer verification, notifying accounting standards, classifying cryptocurrencies as current assets on corporate balance sheets, introducing mechanisms for reporting suspicious transactions, ensuring traceability and bringing crypto under the purview of anti-money laundering regulations.
Enable taxation (direct and indirect) to treat crypto assets similarly to other current assets, and end financial assistance via tax credits and other incentives to crypto startups to foster rapid growth and drive innovation.
Rameesh commented, “Crypto as a current asset, based on the nature of the business holding it, can be held for a short or long term, and gains taxed accordingly,” and pitched for applying FEMA regulations as well as introducing disclosure requirements for individuals holding crypto assets.
Payments and token issues
Allow innovative uses of crypto by businesses and create specific safeguards to protect retail investors from fraud
IndiaTech.org recommended for individuals or businesses, trades in goods or services against any crypto-assets should not be considered cash transactions but rather as “barters.”
“It can be optional, but companies should be allowed to build their infrastructure using crypto
to make current payment systems more efficient,” the whitepaper read. Alternatively, India may initially consider prohibiting crypto as a payment instrument, solely allowing holding and trading.
Further, tokens can be classified as securities, commodities, or neither, depending on their use case, and exchanges must ensure due diligence on tokens listed.
Encourage self-regulation including a code of conduct and regulatory framework in alignment with the government primary objectives of financial stability and safeguarding consumers.
Rameesh pitched for the Government of India to recommend principle-based self-regulatory guidelines for the crypto industry to follow until it introduces further regulation. A government-recognised body implementing this self-regulatory model could then ensure accountability and transparency.
Need for regulatory clarity
IndiaTech.Org’s recommendations for regulating the cryptocurrency industry in India come at a time when regulators are playing catch up with blockchain innovation and crypto adoption.
The 2018 RBI circular stated banks shall not deal in “virtual currencies” or provide services for any person and entity dealing with them. The circular was set aside by the Supreme Court in March 2020.
Despite the verdict, banks continued to cite the 2018 circular, breaking up with crypto exchanges and encouraging customers against using their services to trade in crypto.
Earlier this week, the RBI clarified:
“Such references to the above circular by banks/regulated entities are not in order… As such, in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from.”
The cryptocurrency industry welcomed the statement from the RBI and viewed it as an approval on the use of bank accounts for such transactions and a step in the right direction for the future of the industry.