Cryptocurrency is a new & complicated asset class with implications for all individuals, business and governments – akin to the internet. Not a single person in the world today can fully understand all of these implications and act accordingly – be it to build a business, to invest or to regulate. It is very difficult to keep up with the news & comprehend every new concept developing in this space. Coming up with a regulatory framework for such an asset class has proved to be very challenging for the governments all around the world. The purpose of this article is to elaborate on the current state of crypto regulation in India and why it matters.
In India there is an abundance of need and greed for quick money like many other countries. The inherent complexity in understanding of cryptocurrencies or the lack of talent to educate the masses coupled with an extremely volatile market leads to a vulnerable investor base. Such a market very often becomes an attractive playground for scams to dupe retail investors with get rich quick ponzi schemes. Add to this the cross border nature of cryptocurrency transactions which is being exploited to launder money. Before we talk about regulation and legal implications of crypto, it is important to understand the context and the backdrop that calls for these regulations.
“The internet was the first thing that man built which humanity doesn’t fully understand” -Eric Schmidt of Google
After years of reaping benefits of the internet, it is only now that we are seeing increasing regulations for data privacy and manipulation by the tech giants. If we couldn’t see this coming with the internet, what are the chances that we can successfully regulate blockchain & cryptocurrencies – the layer of internet that can directly transfer money – or one that is money.
The market penetration of crypto in India, though increasing very quickly is still very low. RBI first acknowledged and cautioned India against the use of virtual currencies in December 2013. Ever since then, RBI has continued with their prohibitive stance against the usage of virtual currencies of any kind and in a press release on April 5, 2018 they outrightly banned all entities regulated by them from dealing with individuals or businesses that venture into cryptocurrencies. The Indian rupee may never enter the crypto ecosystem if this ban is not lifted. The infographic below provides a quick timeline of events urging regulations for and against crypto in India.
Some of the cryptocurrency exchanges in India have done a good job of following anti-money laundering and foreign currency exchange laws of the country by enforcing a strict KYC process. But all the Indian authorities have been very slow in setting up a regulatory framework and providing educational resources to the people of India regarding the risks and promises of cryptocurrencies. Though their fear of the country’s financial ecosystem being seriously undermined are very well grounded, the lack of any pro-active measures apart from an outright prohibition is appalling. On the other end however, the government’s tax authorities have been very quick to go after cryptocurrency traders in trying to quantify their profits & tax liabilities.
The anti-money laundering & cyber-criminal fight is a major battle being fought all over the world. The United States and the European Union serve as very good examples to help devise a strict regulatory policy & weed out all the illicit actors. A few studies have been done to quantify the data on cyber-criminal (ransomware, dark web, hacks, etc) and non cyber-criminal activities (money laundering) and it was found that the US were able to prevent them far better than the EU by being pro-active and enforcing strict licensing requirements for exchanges such as Coinbase & Gemini.
India being a developing economy, has additional concerns of capital flight, lack of resources and threat of financial instability that need to be tackled but we sincerely hope for a regulatory framework that leaves room for innovation & one that can attract the right talent to help steer the economy into the digital age. All eyes are now on further direction by the RBI as we approach the Supreme Court hearing on September 11th, 2018.