5 min readDec 14, 2022 09:10 AM IST
First published on: Dec 13, 2022 at 03:58 PM IST
On Monday, founder of the collapsed crypto exchange FTX, Sam Bankman-Fried was arrested in the Bahamas. FTX crashed almost overnight after failing to meet a run on deposits, throwing the crypto industry into its latest crisis. Earlier in October, Singapore-based Chainalysis published the third edition of the Global Crypto Adoption Index, in which India ranked fourth. The Index ranks countries on five sub-indices, each weighted by their purchasing power parity per capita, thus favouring countries where the amount of cryptocurrency trading is more crucial based on the wealth of the average person. India’s performance, therefore, is more significant in light of the country’s low per capita purchasing power.
The need of the hour is to introduce regulations commensurate with this level of crypto adoption and to protect the markets from such episodes. Across jurisdictions, the crypto market and crypto assets have been regulated broadly on grounds of anti-money laundering and combating financing terrorism, taxation, advertising, and consumer protection.
Currently in India, the regulations govern three aspects of crypto-related activities. First, in 2021, the central bank necessitated banks and regulated entities to carry out due diligence in line with KYC norms, and establish standards on anti-money laundering and combating of financing terrorism. Second, the Budget 2022-23 introduced a 30 per cent tax on income from the transfer of any virtual digital asset, without allowing for set off of losses. Third, the Advertising Standards Council of India released guidelines in February this year for advertising and promoting virtual digital assets and services, and directed that advertisements should carry a disclaimer stating the risk of loss from such transactions with no regulatory recourse.
Critically, however, there is a lack of independent prudential regulations and robust consumer protection for crypto assets. For this, India can seek guidance from legal frameworks proposed by the Financial Stability Board (FSB), an international standard-setting body established by the G20, and jurisdictions like the European Union and Singapore.
The FSB released a framework on regulation, supervision and oversight of crypto assets and markets for public consultation this October. The proposed document made nine recommendations broadly covering regulations in line with the principle of “same activity, same risk and same regulation”, governance and risk management proportionate to risk and complexity, adequate disclosures, and framework for data collection, recording and reporting. FSB further recommended addressing financial instability and systemic risks arising out of spillovers from interconnections between the crypto asset ecosystem and the wider financial market.
The G20 at its 17th Summit last month, welcomed the ongoing work by FSB on the regulation of crypto assets and markets. The European Union’s major crypto-related legislation titled “Markets in Crypto Assets Regulations ( MiCA )” is pending EU Parliament’s approval and is expected to come into effect starting in 2024. MiCA seeks to govern issuance, intermediation and trading in crypto assets to preserve financial stability, and prevent market abuse whilst also protecting investors. MiCA introduces licences for crypto assets issuers and service providers, calls for disclosures of the environmental impact of crypto assets, ensures traceability of crypto asset transfers, requires maintaining liquidity to meet investor’s redemption requests and places the liability of loss of crypto assets on service providers.
The Monetary Authority of Singapore in October released a consultation paper on the Proposed Regulatory Measures for Digital Payment Token (DPT) Services dealing with mitigating associated risks of cryptocurrency trading. The proposal introduces provisions on consumer protection including, disclosing relevant risks; undertaking a risk awareness assessment of consumers; and restricting incentives that can unduly influence the decision of retail consumers. The business conduct provisions address conflicts of interest arising from multiple roles performed by DPT providers and require DPT providers to establish grievance redressal processes. Additionally, the proposal attempts to mitigate technological risks with a requirement to maintain the high availability and recoverability of critical systems.
In India, the RBI Concept note on Central Bank Digital Currency (CBDC) has presented the digital rupee as a replacement for cryptocurrencies. However, Indian crypto firms have criticised this position, and argued that cryptocurrencies and CBDC can co-exist in the market as the two are not comparable.
Even if the RBI’s proposition is considered valid, CBDCs are at a pilot stage and will take longer to be developed and adopted. In the meanwhile, the uptake of cryptocurrency in India remains high. India has called for international co-operation on the regulation of private virtual currencies and hinted at crypto regulation as a “working priority” at the G20. In the backdrop of the country assuming the G20 Presidency and the FSB’s proposed framework, a comprehensive crypto regulation framework, along with an internationally accepted taxonomy, should be of critical importance to India. It should be at the forefront of voicing the specific concerns of the Global South, particularly those related to capital flight issues.
The writers are consultants at National Institute of Public Finance and Policy. Views are personal
Former FTX CEO Sam Bankman-Fried has been arrested in the Bahamas. (File Photo) 
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