AMID RENEWED parleys within policy and regulatory circles on the need to define and regulate cryptocurrencies, the Parliamentary Standing Committee on Finance has called cryptocurrency associations and industry experts on Monday for a meeting on ‘CryptoFinance: Opportunities and Challenges’.
The Finance Ministry has already held multiple meetings with financial sector regulators and industry stakeholders over the last few weeks to deliberate on the need for a legislative framework on cryptocurrencies. Though the Reserve Bank of India and the Securities and Exchange Board of India have voiced their concerns over the unregulated growth of the sector, a consensus seems to be emerging among a section of policymakers in favour of defining cryptos as an asset class, but not as legal tender.
“On crypto…we have serious concerns from the point of view of macroeconomic and financial stability. How the issue has to be dealt with — we have given our detailed suggestions to the government; as far as I know the matter is under the active consideration of the government and the government will decide,” RBI Governor Shaktikanta Das said on Wednesday at a Business Standard event.
While the RBI has repeatedly voiced concerns about cryptocurrencies being accepted as legal tender or at par with cash, capital market regulator SEBI has reservations on regulating them as a financial asset, sources said. The latter has flagged that it has no control over the “clearing and settlement” of cryptos, and that it cannot offer counter-party guarantee as is being done for stocks, a senior official told The Indian Express.
The RBI has argued that it is in the process of introducing a central bank digital currency (CBDC), which should be allowed to run instead of the private tokens, the official said. The RBI has warned the public against other virtual currencies several times in the past.
It has also argued that if crypto is treated as currency, then interest bearing deposits on cryptos need to be introduced to protect the effectiveness of the RBI policy, another senior government official said.
In its comments submitted to the Department of Economic Affairs on the draft Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018, SEBI had said it was not best suited to be the regulator of crypto assets and tokens. Three years down the line, the regulator’s position has not changed, the official said.
On their part, the regulators seem to be waiting for greater clarity from the government.
“The government needs to first decide whether it is a currency, commodity, or security… It will then have to be seen who will regulate it. They can even set up a new regulatory body for this,” a senior official in the regulatory set-up said.
In such a regulatory vacuum, the crypto market has been growing — even though RBI believes it’s not growing as much as market players are claiming.
In the absence of a law, the Department of Revenue in the Finance Ministry is of the view that cryptocurrency investors and traders should pay tax on gains and income on transactions. “Since income is being generated from this activity (trading in cryptos), the department has the right to tax, irrespective of whether this activity itself is legit yet,” the official said.
Experts and even industry stakeholders are increasingly willing to subject themselves to regulation. Nilesh Shah, MD, Kotak Mahindra AMC and part-time member of the Prime Minister’s Economic Advisory Council said the market was too big to ignore now. “I believe regulators are working on it. There will be some regulation. Crypto is becoming more of a semi-urban and rural phenomenon. In Tier-II towns, it’s spreading like wildfire,” he told The Indian Express in a recent interaction.
“I am not qualified to say if crypto is a fraud or not… Who knows, it may be the future and we are early entrants, so why not regulate and make people aware that this is high-risk, high return… so that tomorrow if it goes out of hand, it does not jeopardise many investors,” Shah said.
The government held off on plans to introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, in the budget session as it continued discussions with stakeholders. The draft law proposed to prohibit all private cryptocurrencies and laid down the regulatory framework for the launch of an “official digital currency”. However, the view on outright prohibition seems to have evolved since then.