India May Have Quietly Shown Its Hand on Crypto Regulation

1 July 2021

June was a dramatic month for cryptocurrency – not only in terms of price fluctuations but also regulations. While we saw good tidings like the declaration of bitcoin as a legal tender in El Salvador, regulatory crackdowns in countries like China have turned the market bearish. More quietly, in India a seismic regulatory development has passed by relatively unnoticed.

The past few months have seen some positive regulatory moves by the government here. In March, the Finance Minister denied the possibility of a blanket ban “shutting off all options” and outlined the government’s plans to take a “calibrated” approach towards cryptocurrencies in the country. She went on to emphasize the need for experimentation in blockchain and cryptocurrency. 

Tanvi Ratna, a CoinDesk columnist, is the founder and CEO of Policy 4.0, a research and advisory body working on new policy approaches for digital assets.

Later, the Ministry of Corporate Affairs (MCA) declared it mandatory for companies to declare their crypto investments during the financial year – considered by some as a step towards regulations, even hinting towards the possibility of upcoming tax regulations. All these developments have led to a major boom in the Indian crypto industry. A recent Chainalysis report indicated that crypto investments in India this quarter have gone up 612% from $923 million in April 2020 to nearly $6.6 billion in May 2021.

On the other hand, Indian crypto exchanges saw their banking access being restricted. The Reserve Bank of India’s (RBI) governor clarified on the record that there was no change in the RBI’s stance on cryptocurrency. Right after that, the Enforcement Directorate (ED), India’s financial crime investigator, issued a show-cause notice to WazirX – India’s biggest crypto exchange – for facilitating money laundering. This also comes at the same time as global regulatory action on Binance, Wazir-X’s parent company. Binance companies have had to cease operations in Ontario and now in the U.K. due to regulatory pressures.

WazirX has been charged with allegedly infringing the Indian Foreign Exchange Management Act (FEMA) on cryptocurrency transactions worth Rs 2,790.74 crore, roughly $374 million. According to the ED, around INR 57 crores (approximately $7.6 million) was laundered by a Chinese-owned illegal online betting app by converting rupee deposits into the tether stablecoin and then transferring the funds to Binance wallets based on instructions received from abroad. The ED also accused WazirX of violating basic know your customer/anti-money laundering (KYC/AML) rules for foreign transactions.

The case could have ramifications for the treatment of cryptocurrency under Indian law. This is significant because the Indian government, outside of the 2019 “Report on Virtual Currencies” that saw no place for cryptocurrencies in India, has not made any statement on how it views the nature of virtual currencies. Apart from an unverified news report that cryptocurrency might be viewed as an asset (which was superseded by this verdict), there has been no indication of whether the government views these assets as currency, commodity or in other terms. However, two important public documents now equate crypto to currency in functionality.

The recent ED notice contains a single apparently innocuous sentence which has been missed by most observers. The ED investigation concluded that crypto is in fact “akin to money” or currency under the Foreign Exchange Management Act (FEMA).

Excerpt from the Enforcement Directorate notice to Wazir-X

This builds upon a second public sector document that revealed similar conclusions: the Indian Supreme Court verdict on cryptocurrency that came out in March 2020. This was a part of other major red flags that I had analyzed in this video the day after the verdict. The Supreme Court came to a similar assessment that cryptocurrency could very well function as money even if the law did not recognize it that way.

Excerpt from the Indian Supreme Court verdict on cryptocurrency in March 2020

The Supreme Court verdict at several points also reiterates this conclusion that cryptocurrencies are quite capable of functioning as money, despite what is decided on their legal tender status.

Although the RBI has made no comment with regard to the nature of cryptocurrencies, in its 2018 circular it did cite the potential of virtual currencies to create a parallel system of payment that albeit does not fit the criteria of a payment system.

If cryptocurrency is “akin to currency,” that will have several implications for the industry in India. Any money-like instrument is firmly under the supervision of the Reserve Bank of India, which has held a consistent stance on cryptocurrency since 2013. The flow and transfer of money is highly regulated in India, both within the financial system as well as across borders, opening up multiple regulatory considerations for industry players. There could also be implications for the treatment of NFTs, DeFi and other breakthroughs in the sector. This is one development to track closely.

CORRECTION (July 2 , 12:08 UTC): This post has been corrected to show, per Chainalysis, that crypto investments in India rose from $923 million in April 2020 to nearly $6.6 billion in May 2021.

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