In the New Delhi Declaration, G20 leaders have signalled their commitment to establishing a “coordinated and comprehensive policy and regulatory framework” for crypto assets in order to commit to a crypto regulation. This commitment reflects a global effort to set international standards for the cryptocurrency industry. Additionally, G20 leaders have endorsed the guidelines proposed by the Financial Stability Board (FSB) for regulating crypto-asset activities. These guidelines primarily aim to mitigate systemic financial risks and provide G20 member countries with flexibility in crafting their domestic regulations.
India’s Alignment with Global Recommendations
India has already aligned its foundational policies with recommendations from global bodies such as the FSB and the International Monetary Fund (IMF). These organizations emphasize that crypto assets should not be treated as legal tender or banned outright. Recognizing the potential pitfalls of such extreme measures, India wisely abandoned its initial consideration of a crypto ban. Legal tender status for crypto assets can undermine domestic monetary policy, while outright bans may encourage illicit activities.
Anti-Money Laundering (AML) and Tax Policies
India has implemented AML and tax policies for crypto assets. AML rules require crypto exchanges to report suspicious activities to the Financial Intelligence Unit and respond to the agency’s information requests. However, the taxation of crypto transactions has been a point of contention, with a 30% income tax on annual profits from crypto-asset trading and a 1% deduction at source for each transaction.
Focus on Financial Regulation
The FSB and IMF highlight the shared vulnerabilities between the crypto-asset world and the traditional financial system. Prioritizing the regulation of market intermediaries, such as crypto exchanges, is a logical step. This aligns with the notification of entities dealing with crypto as persons engaged in a designated business under the Prevention of Money Laundering Act, 2002. This approach, akin to how traditional stock exchanges operate under the Securities and Exchange Board of India (Sebi), offers a template for regulating the diverse and complex crypto markets.
Addressing Unique Challenges
Crypto-assets pose unique challenges due to their technical characteristics. Regulated exchanges can play a pivotal role in demystifying the origins of these assets, ensuring that issuers provide sufficient transparency. For example, the EU’s regulation mandates crypto-asset issuers to produce a “white paper” detailing various aspects, including user rights, underlying technology, and risks.
Revising IT Legislation for the Digital Age
India’s ongoing revision of the Information Technology (IT) Act presents an opportunity to address the specific needs of crypto asset intermediaries, which operate primarily online. Specialized provisions can enhance user safety in these digital platforms. Future IT legislation can also offer legal clarity for emerging digital products, such as those related to Web 3.0, and explore overlaps with Web 2.0, like social media marketing.
Challenges Remain with Stablecoins and DeFi
Regulating stablecoins and decentralized finance (DeFi) poses additional challenges. Stablecoins, including algorithmic variants, have shown vulnerabilities to manipulation, as seen in the Terra Luna incident. DeFi operates without centralized intermediaries, making it complex to regulate effectively.
As India navigates the evolving crypto landscape, crafting a regulatory framework that respects the unique challenges of this emerging market is essential. Active industry participation in shaping these regulations will be crucial for striking the right balance between innovation and risk mitigation.
