India Update: The Cryptocurrency Bill, 2021 – From Prohibition to Regulation

Background

• In March 2020, in a landmark decision, the Supreme Court lifted the ban on cryptocurrencies in India.
• Following the Supreme Court ruling, the Indian government brought out the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
• This bill is being reworked, and the reworked bill (the “New Bill”) is expected to recognize cryptocurrencies as an asset class (“Crypto-assets”) regulated by the Securities Exchange Board of India (“SEBI”).
• Crypto-assets will not be accepted as legal tender in India under the New Bill.
• Crypto-assets can be traded on existing crypto exchange platforms regulated by SEBI, but any trading violations will attract strict penalties and punishment.
• Crypto-asset holders will be prescribed a cut-off period to bring their assets under authorized crypto exchange platforms.

Advantages

• Recognizing crypto-assets under a regulatory framework will be highly beneficial for crypto-asset investors and the crypto industry in India in general.
• Unauthorized trading of private crypto-assets in India will be significantly reduced.
• Laws under the Prevention of Money Laundering Act, 2002, will be applicable to deter terror financing activities.
• Crypto-assets will aid in the implementation of the Reserve Bank of India’s proposed Central Bank Digital Currency as legal tender in India.

Drawbacks

• Crypto exchanges, cryptocurrency trading and the application of the blockchain technology will be deprived of their most essential feature that is decentralization or decentralized finance (“DeFi”).
• Trading of cryptocurrencies as crypto-assets will be limited to Indian exchanges.
• Cryptocurrency holders will not be allowed to maintain private crypto wallets.
• No regulatory framework for crypto or digital assets that are not mutually interchangeable like non-fungible tokens or NFTs.

Views

• An outright ban on crypto-assets would have proliferated illegal trading.
• But, recognizing crypto-assets as currency given the complexities of regulating the underlying distributed ledger technology (“DLT”) could have weakened India’s economy and financial systems.
• Hence, the middle-path proposed under the New Bill to identify and regulate crypto-assets is conducive for the time being.
• Indian investors routinely make cross-border crypto investments on foreign exchanges. ▪ Changes are being proposed to Indian foreign exchange regulations to better regulate such investments. ▪ Banks will have to ensure compliance with foreign exchange regulations applicable to outbound remittances.
• The Income Tax Act, 1961, should be amended to provide for taxation of income from the sale of crypto-assets as capital gains (similar to share sale transactions).
• The DeFi ecosystem has been the driving force for the growth of crypto assets; hence, centralization of a decentralized network will nip DLT in the bud.
• Authorized Indian crypto exchanges will have to develop robust customer due diligence mechanisms and governing standards for Know You Customer (KYC) to combat terror financing and money-laundering.

Once the New Bill is approved, the Indian government and regulators will be expected to establish frameworks:

• to regulate the practices of mining, staking, or yield farming of crypto assets; and
• to address the risks associated with mining, trading, or staking crypto assets, such as impermanent loss, server risk, volatility risk, liquidation risk, etc.

By Majmudar & Partners, India, a Transatlantic Law International affiliated firm.   

For further information, please contact Neerav Merchant at indialabor@transatlanticlaw.com

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