Regulating crypto assets in India
The Indian crypto asset industry has witnessed exponential growth over the last five years and today, the country reportedly has 15 million crypto asset holders that have put in Rs6.6 billion in these crypto asset holdings. India now has two crypto unicorns and over 350 crypto startups in what is clearly a flourishing industry.
This report seeks to bring clarity around crypto assets as a technology and make recommendations for the regulation of the Indian crypto asset market. Like all financial assets, crypto assets pose certain policy risks that must be addressed through a coherent framework that balances the public interest with the need to encourage innovation. Towards this end, the report recommends the induction of a safe harbour for crypto assets, similar to the one inducted for internet intermediaries in the Information Technology Act, 2000 and the Copyright Act, 1957. The size of first-generation internet technology companies today is testament to the enabling power of safe harbours as a tool to promote innovation. If the crypto asset space presents the future of the internet, as many experts propound, it is imperative that the crypto industry be afforded the same legal succour that allowed big technology companies to reach where they are today.
In an effort to establish regulatory recommendations for India, the authors have carried out an exhaustive study of international regulatory approaches and bucketed them into four categories. The first approach involves accommodating crypto assets into existing frameworks as they stand. The problem with this approach is that several crypto assets do not fall neatly into the definition of existing financial instruments and therefore fall outside the regulatory ambit. The second approach is innovation-friendly steps taken by some regulators to encourage startups to set up base within their jurisdictions and help the local crypto industry grow. The third is crypto-specific legislation or amendments that address the concerns around licensing and registration, definition, tax, money laundering and terror financing, and investor protection. This approach is comprehensive and seems the most practical route and is being adopted by most advanced financial jurisdictions.
The analysis of possible regulatory pathways under existing regulation in India reveals a similar problem. It is likely that most prominent crypto assets such as Bitcoin would not be suitably accommodated as securities, or commodities. While crypto assets may be recognised as capital assets, the frameworks that currently regulate these assets in India would necessarily leave gaps in investor protection and service provider registration.
The analysis of the way crypto markets work, reveals that the industry should be regulated through exchanges. These entities account for the bulk of the volume of activity in most major crypto networks and provide point of entry for most retail and institutional investors into the crypto market. As such, they should serve as the designates for regulation around the various policy risks presented by crypto assets.
(The study has been authored by Megha Bal, Shweta Venkatesan and Varun Ramdas)