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Tuesday, January 18, 2022

India needs thoughtful legislation on digital currency

Cryptocurrency-related developments drive home the necessity of law that keeps pace with changes in technology

Written by Menaka Guruswamy |
Updated: December 25, 2021 9:09:30 am
The research firm Triple A tells us that Singapore, where roughly 10 per cent of the population is crypto-owners, has the Payments Services Act, 2020 that has streamlined both traditional and cryptocurrencies under one law. (Illustration: C R Sasikumar)

As 2021 comes to an end, I think back to the dramatic changes in technology that the law, lawmakers, courts and lawyers are being forced to confront. Technology has outpaced the law, and lawmakers are being challenged by how quickly “we the people” have embraced technological transformations. Constitutional and policy challenges abound, pertaining to what we read, what we view, how we transact and who knows how we do all of this.

Some of these challenges include: Ought digital media platforms be regulated as press or otherwise? Should Over The Top (OTT) streaming services self-censor or be censored? Who is accountable for procuring and deploying spyware like Pegasus? How do we regulate the bias within artificial intelligence that governs so much of our lives today? What must traditional anti-discrimination law do to keep up with the bias in algorithms?

In probably no other area are lawmakers required to appreciate science and technology than in cryptocurrency. With 10 crore users of cryptocurrency and crypto assets in India, this ever-expanding market is almost entirely unregulated. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, that was widely expected to be tabled in Parliament in the Winter Session, has been held back.

As I wrote in my last column (‘Who’s afraid of crypto’, IE, December 11), the initial foray by the state, in the form of the RBI, was to ban any banking transaction with a person or entity who held or dealt in cryptocurrencies — essentially a death knell for the medium itself. The Supreme Court struck back with a nuanced decision that found this ban disproportionate and hence unconstitutional. While our government still thinks about the way forward, let us look at the best practices or legislative models that have been adopted. Essentially, countries where cryptocurrencies and crypto-assets are legal have frameworks that mandate KYC (know your customer), AML (Anti-Money Laundering) mechanisms and demand adherence to CFT (Combating Financing of Terrorism) requirements.

The research firm Triple A tells us that Singapore, where roughly 10 per cent of the population is crypto-owners, has the Payments Services Act, 2020 that has streamlined both traditional and cryptocurrencies under one law. The law also provides a framework to obtain licences to operate crypto businesses. Singapore’s philosophy on cryptocurrencies is best explained by Ravi Menon who heads the Monetary Authority of Singapore (MAS). He explained that the best approach was not to ban, but to put in place “strong regulation”. He further added that MAS believes that amongst the potential benefits of blockchain technology is that it enables applications where “it was important to know the history of ownership and transfer of value especially when there was no trusted central party or where reliance on a central party was too costly.”

Similarly, Switzerland has also favoured the strong regulation model overseen by an already established financial regulator. The Swiss Financial Market Supervisory Authority (FINMA) that oversees the country’s financial markets mandates that all virtual asset service providers, including cryptocurrency exchanges must be licenced. KYC, AML and CFT procedures must be strictly complied with. These are the checks on the use of cryptocurrencies and crypto assets that could
facilitate criminal enterprise.

Let us now move away from small countries like Singapore and Switzerland to a large constitutional democracy like the US. The US does not consider cryptocurrency to be legal tender but defines cryptocurrency exchanges to be money transmitters. The Internal Revenue Service (IRS) treats cryptocurrency as property for US federal taxation purposes. Exchanges must obtain requisite licences from the Financial Crimes Enforcement Network and implement the standard AML and CFT requirements that have become the norm in most jurisdictions that regulate cryptocurrencies.

One of the most important lessons to absorb from the US is the revenue potential of cryptocurrencies and crypto assets. On August 10, 2020, the US Senate passed a $ 1 trillion bill aimed at improving infrastructure in the country. To assist in paying for this, the bill includes a provision of taxing cryptocurrency brokers. This will enable the collection of almost $ 28 billion in tax revenue over a decade. This highlights the potential revenue any state including India can earn by regulating and taxing cryptocurrencies and those who deal in them.

As always with regulation and taxation comes responsibility. In September 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued the first sanction against a crypto-exchange, designating the exchange SUEX as a “malicious cyber actor”. According to the Treasury Department’s press release, over 40 per cent of SUEX’s known transactions are associated with illicit actors including criminal ransomware actors.
In India, the need of the times is thoughtful legislation and rigorous regulation of cryptocurrencies and crypto-assets that are already here and being used. If we do not do so or if we go back to considering a ban on these instruments, we will be left years behind in this technological leap that has been embraced by other jurisdictions and our own people. It is time for the law to now keep up.

There is much to think about as the year comes to an end. In the meanwhile, Merry Christmas, seasons greetings and a very Happy New Year, dear readers. Have a safe and joyous year ahead and do remember to keep masking.

This column first appeared in the print edition on December 25, 2021 under the title ‘Happy teach new year’. The writer is a senior advocate who practices law at the Supreme Court


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