Less Cryptic Over Crypto

From banning cryptocurrency in 2018 to having the decision overturned by the country’s Apex Courts, India has traversed a well-documented journey in the crypto universe. In this period, we have vociferously articulated regulation, legislation and licensing and gone completely silent while appearing to disregard a phenomenon that took the world by storm. 

However, post the G20 Summit, India’s anti-crypto stance might just have thawed a bit though there are still significant doubts over how the policy planners see its role shaping up in the fast-paced digital transformation seen in the country. That the RBI is amongst a few Central Banks to bring forth their own digital currency is not lost on us. 

Ironically, the industry was once again in the crosshairs with RBI playing the hawk and the government remaining blissfully cryptic about its own thoughts on cryptocurrencies. Uncertainty loomed large for the enterprises that sought to popularize digital currencies, blockchain based non-fungible tokens (NFTs) etc.

The G20 declaration is a good starting point

Given this background, what transpired at the G20 summit in New Delhi came as a breath of fresh air. The member countries endorsed the IMF report as well as the views expressed by the Financial Stability Board on risks and regulations. In doing so, it stated that there would be no ban on crypto assets and creation of a reporting and licensing system by 2025. 

The New Delhi declaration on crypto currency read as follows: “We continue to monitor the risks of the fast-paced developments in the crypto asset ecosystem. We endorse the FSB’s high-level recommendations for the regulation, supervision and oversight of crypto-assets activities and markets and of global stablecoin arrangements.” 

Of course, no decisions were expected at the G20 summit and none were taken. It was decided to continue the debate at the annual IMF-World Bank meeting slated for Morocco in October. Given that India currently ranks fourth among countries adopting cryptocurrency, this must be termed as a welcome development.  

What next? It’s up to our policy planners now

However, what follows from here on continues to depend on the policy planners, both in the government and the industry. In the past, we have seen the government’s draft cryptocurrency norms in 2021, followed by a 30% tax on crypto earnings imposed by the finance ministry that led to transactions almost getting wiped off crypto exchanges. 

Almost as a hindsight, finance minister Nirmala Sitharaman then noted in Parliament that crypto assets being borderless, it would be tough to ban or regulate them via country-specific legislation. She shared a global perspective by seeking global collaboration to regulate crypto currencies, a financial asset that saw large-scale adoption during 2021-2022. 

It was at India’s insistence that the IMF and the FSB came up with the policy paper for regulating virtual digital assets – one that formed the foundation for the G20 declaration around this topic last week. In fact, the FSB could draw a global baseline to regulate cryptocurrencies through harnessing the benefits while eschewing the risks. 

There’s a template laid out now 

This way, countries could build their specific rules on top of this broader framework based on their risk-wariness levels. What it also did was remove the need for a blanket ban as members became aware of the operational challenges around its implementation. The FSB presented a detailed note that could be seen as a road-map to regulation. Some salient points are:

• No blanket ban on crypto-related activities such as making trades illegal. The paper noted that such bans could move activity to another geography, thus making the issue more complex to resolve. India’s 1% TDS on cryptos resulted in transactions moving to other platforms outside. 
• An era of licensing and supervision of crypto assets service providers will be put in place to mirror those of banks and financial institutions. These would come with appropriate reporting dashboards in order to reduce data gaps and provide help to agencies to monitor cross-border transactions. 
• Guardrails on money laundering once the regulations are in place by creating a fail-proof system of due diligence, record keeping and reporting. Also, transparency can be achieved through collecting and holding data of senders and receivers at the service providers’ end during each transaction.
• Clearly defined taxation could obviate risks associated with a lack of clarity around assets that are pseudonymous. There could be under-collection of taxes and lack of clarity around cross-border transactions could also open up an entirely new set of loopholes that could result in a fresh crop of tax havens.  
• A solid data framework needs to be the backbone for all these activities, ranging from collecting, storing, safeguarding and reporting the data. The paper notes that regulatory authorities must be given access to data as required to fulfill their regulatory, supervisory and oversight functions. 

Other recommendations made by the FSB note includes cross-border collaboration to foster efficient and effective communication and data sharing to monitor transactions and having a more decentralized approach to stablecoins whereby they comply with local regulations before shifting attention to a cross-country approach. 

Where will the G20 go from here?

Given that the framework is now in place, we can expect some concrete moves post the October meeting of the Bretton Woods Twins. Assuming that a consensus emerges on regulation, there could be a base system that is drafted out for countries to then build their own set of regulations around them. 

From an industry perspective, the shift would be a welcome one as there would be a more concrete approach to solving a problem that is confined to virtual space. Issues such as consumer protection did find mention in the note, a lot needs to be done on educating the participants better about cryptocurrency and its risks. 

Of course, naysayers continue to harp on the government’s resistance to cryptocurrency with some noting that the G20 declaration can only be seen as a guideline that governments can take or leave completely or in parts. We believe India’s leadership at the G20 would be the starting point from which policy planners can collaborate with their peers in other countries to formulate a clear strategy around these digital assets. 

Till such time, all we can do is stay silent and hope that crypticism makes way for clarity.