Three back to back events have put a question mark over the possibility of cryptocurrencies emerging from the shadows sometime in the near future despite a strong pitch by the stakeholders through advertisements, claims of rising public participation and breaking of ice of sorts in the form of a first high-level meet of crypto operators with a parliamentary panel.
First, RBI Governor Shaktikanta Das made it clear there was no change in the central bank’s position that the issue needs deeper discussion and the number of crypto accounts in India was being exaggerated.
Second, the Parliamentary committee on Finance that met on Monday flagged serious concerns over the obscurity of cryptocurrencies, operations of crypto exchanges and impact on the economy.
Thirdly, after a meeting by Prime Minister Narendra Modi on Saturday with stakeholders and experts and the RBI, Finance Ministry, Home Ministry on cryptocurrency, the government said, “It was strongly felt that attempts to mislead young people by exaggerating returns and using opaque advertising should be stopped.”
THE CRYPTO PITCH FOR LEGITIMACY
India Today has accessed exclusive details of the presentations made by Blockchain and Crypto Assets Council (BACC) and industry and commerce bodies, the CII and ASSOCHAM, before the members of a parliamentary committee on Monday.
The BACC presentation, titled “Crypto-finance Opportunities & Challenges”, lists the opportunities the industry offers and its needs and recommendations.
Under “Regulation and Customer Protection”, the BACC presentation said the Indian crypto exchanges struggle to form consistent compliance guidelines and report red flag items to the appropriate authorities in the absence of regulations.
It cited the example of the UK’s Financial Conduct Authority, Singapore, the US, etc. where regulations have been put in place. It claimed that these measures allowed the regulator to monitor exchange operations and ensure compliance with KYC, AML, and CFT guidelines, such as submitting risk reports, risk assessments, customer due diligence, reporting suspicious activities, cyber security mechanism and consistent frameworks for consumer protection and an appropriate classification system for crypto that would facilitate effective tax guidelines.
The BACC has recommended that crypto assets could be officially classified as utility, security, property tokens, intangible commodities, or virtual assets that would ensure that the usage of tokens was governed appropriately and they were not confused with legal tender.
Contrary to the charges of obscure operations and exaggerated returns flagged by the government after the PM’s review meet, the presentation claimed regulatory uncertainty and conflicting media messages had created false impressions in the public mind about crypto finance.
The BACC demanded that the government should create a new independent regulator empowered by legislation to deal with and regulate all matters pertaining to crypto finance.
This new independent agency, according to stakeholders, might make registration of all entities mandatory by putting in place a principles-based regulatory framework for various cryptofinance classifications and
business models based on their modus operandi.
Under the sub-head “prospects”, the BACC presentation said crypto finance could revolutionise the financial sector and global economy as it includes crypto assets, non-fungible tokens, smart contracts and decentralised finance.
It underlined that with a progressive regulatory framework, crypto finance market capitalisation had a potential to reach $1 trillion by 2025 and this could aid India’s aspiration to be a $5 trillion economy by creating an orderly growth of the industry, raising investors’ confidence and increasing wealth and tax creation.
Realising that boosting employment and raising revenues were key government agendas, the BACC claimed that the crypto finance industry, directly or indirectly, employed more than 50,000 people in India and had the potential to generate in excess of 8,00,000 jobs by 2030 along with improving financial access and increase tax collection to over Rs 7,500 crore.
To highlight the popularity of cryptos, the presentation said that over a 5-year period, Indian holdings of crypto could exceed $100 billion crypto finance.
CLAIMS BY CREBACO STUDY
The assessment of CREBACO Global Private Limited, a research, intelligence, and rating company focused on blockchain and cryptocurrencies, is that the crypto asset market in India is worth $15 billion and the size of the Indian crypto community is very large.
As per its representation made before the government in January this year, the Indian crypto community may consist of over 6 million users or approx. 0.5 per cent of the Indian population.
The presentation, submitted to the Parliamentary panel, says that since the last time CREBACO evaluated the Indian ecosystem, the crypto asset market has gone up by over 40 per cent (based on web traffic, and number of app downloads, market conditions).
This means that from the previous estimate of $12.9 billion, the current crypto ecosystem has grown to a potential market size of over $15 billion and despite the Covid-19 situation and the ensuing nationwide lockdown, the number of crypto users in India increased to over 6 million users.
THE CII VIEW ON CRYPTO
The Confederation of Indian Industry (CII), which is being consulted by the government on the issue, was one of the invitees to the parliamentary panel meet on Monday. The CII is batting for a balanced and thoughtful regulatory approach to crypto/digital tokens, with a regulatory tool box that accepts, not reject and outlaw, the new world of crypto/digital tokens founded on decentralised, digitally verifiable financial interactions enabled by blockchain technology.
To begin with, it wants the government to set up a standing advisory council comprising of representatives from regulators, policy makers, participants and stakeholders to act as a sounding board.
Its presentation at the parliamentary panel meet flaged several questions on regulating crypto/digital tokens that would influence the regulatory trajectory.
These include: Should, for the purpose of regulations, crypto/digital tokens be considered as ‘security’ or ‘commodity’? If crypto/digital tokens were considered as ‘securities’, which aspect of crypto/digital currencies issuance, dealing, or custody needs to be regulated, and with what regulatory objective? How to deal with “malicious actors” whose actions can harm public interest? How to ensure tax compliance by participants investing or dealing in crypto/ digital tokens? What mechanism, if any, should be evolved to safeguard compliance with foreign exchange laws given the global financial asset character of crypto/digital tokens?
The CII recommended that the first focus should be to address concerns of AML and tax compliance in the new paradigm of crypto/digital tokens for regulations that need to be cognizant of the reality of this new age of decentralised crypto/digital tokens, where the creator of crypto/digital tokens, in most cases, is a jurisdiction-less, leader-less Digital Automated Organisation (DAO) an internet native global community governed by a self-governing software code, incapable of being identified as an “entity” that could be subjected to regulation.
The proposal is to have regulations on AML and tax compliance centres around transactions and centralised entities within Indian jurisdiction.
To kick start the regulatory mechanism, CII proposed to treat crypto/digital tokens as ‘securities’ of a special class to which the provisions of existing securities regulations would not apply.
Then, it suggests new set of regulations appropriate to the jurisdiction-less, decentralised character, with focus principally on dealings and custody, rather than on issuance (except where issuance entails an ICO — initial coin offering — to public by an issuer established in India).
If there are centralised exchanges and centralised custody providers established in India, they should register with SEBI and adhere to KYC and AML compliance requirements that apply to financial market intermediaries, be legally accountable and liable for safe keeping of the crypto/digital tokens held by participants in digital wallets offered by them. To support this obligation, centralised exchanges may be required to maintain minimum capital and guarantee fund.
To end the opacity of cryptocurrencies, the CII proposed that regulations should ensure investor disclosure requirements and report to the Income Tax authorities, information on transactions in excess of the minimum threshold of each participant’s dealings on the exchange.
It also suggested extending treatment of crypto/digital tokens as ‘securities’ of a special class, subject to income tax law and GST law and treat crypto/digital tokens as ‘capital assets’ for income tax purposes, unless specifically treated as ‘stock in trade’ by a participant. The CII presentation admitted that the regulators and tax authorities might have to start capacity building to handle the large volume of data and analytics for surveillance.
THE RBI HURDLE
Despite the tall claims by BACC & CII, crypto’s future drive confronts the big RBI hurdle. On Tuesday, Shaktikanta Das, at an SBI event, virtually challenged all the claims and demands of the cryptocurrency stakeholders.
“I would like to reiterate that the number of accounts is exaggerated in the sense that about 70-80% of accounts being cited are small accounts of Rs 1,000-2,000 and even Rs 500. So, anecdotally, and we have a lot of feedback, that while credit and incentives are being provided for account opening, the amount in these ranges between Rs 500-2000,” Shaktikanta Das said.
The RBI chief said he agreed that the value of trading in cryptocurrencies had gone up but “when the central bank says we have serious concerns from the macro economic and financial stability point of view, then there are serious issues involved”.
“I am yet to see serious well informed discussions in public space. There are discussions that this is a new technology and we should capitalise on it. But, this technology is 10 years old. Blockchain didn’t come yesterday. The technology can grow. At this time, the RBI, as central bank, which is entrusted with the task of maintaining financial stability, after due internal discussion, says there are serious concerns, then there are deeper issues needing much deeper discussions,” Shaktikanta Das said.
With the RBI strongly against the idea, the government is not expected to give a go-ahead to private virtual currencies in India.
PARLIAMENTARY PANEL’S POTHOLES FOR CRYPTOS
Any bill the government brings on the crypto issue will go to Parliament’s Standing Committee on Finance that is headed by former junior Finance minister Jayant Sinha and has an illustrious economist like Manmohan Singh as a member.
On Monday, when the BACC and other invitees deposed before the panel, the members, cutting across party lines, outlined serious concerns about the existence and growth of cryptocurrencies in the absence of regulations.
A BJP MP challenged the claims that a large number of Indians were investing in cryptos. “There are barely 8.3 crore direct tax payers in india. Against this, there are claims that nearly 6 million have joined the crypto bandwagon. This is a contradiction or a case of evasion,” he said.
Another MP asked what kind of KYC procedures were followed for investors and how was the verification exercise carried out. Almost every member of the panel expressed serious concern over the full-page crypto advertisements in national dailies.
A Congress MP is said to have said, “It’s important to ascertain how interface of cryptos with real economy takes place. Currency is the domain of the sovereign whereby it’s value is fixed in a way. In crypto, it’s a computer programme that is managed on a distributed format and its value is only discovered in the interaction between buyer and seller.”
“When the internet can’t be regulated, how can crypto, which operates on the internet, be regulated,” he said.
A TMC MP is said to have stated that cryptocurrency operations were going the “ponzi scam” way in which the demand was generated first and the regulations came later.
While none of the members spoke of banning cryptocurrencies, there was unanimity that regulations need to be worked out but it can’t happen soon.
To cross check the claims of crypto operators and industry bodies, the panel now plans to meet representatives of Finance and Home Ministry as there are concerns about the use of cryptocurrencies being used to fund terror and anti-national activities.
THE GOVERNMENT’S OPTIONS
The review meet by PM Modi indicated that things had changed since February this year when there were indications that the government might bring a bill banning cryptocurrencies and introduce India’s own digital currency in which people can invest and trade with little interface in real economy.
The RBI, which had banned them though still wary of their impact on financial stability, is pushing for deeper debate before a decision.
However, the government and RBI are still on the same page and displaying abundant caution. While there is talk about a bill on the making, sources said that priority was investor protection.
The government is in no mood to let marketing push by cryptocurrencies go unchecked and eventually be left with a situation like few years ago when retail investors lost money investing in complex, risk ridden and unregulated instruments like chit funds, poorly run cooperative banks and private financial institutions.
Top sources said that currently the thinking was that such setbacks should not happen in India’s unregulated cryptocurrency market. Top sources in the government said the RBI chairman’s repeated caution was an indication of which way things were headed for cryptocurrency in India at least for now.