Crypto News: India Can Achieve Responsible Development of Cryptoassets Through Self-Regulation

The rise of the crypto-asset industry In recent years, the market journey has been dynamic and unpredictable. Although crypto assets are not yet a significant part of the global financial system, this is also starting to change and their presence is now indisputable. However, the borderless nature of crypto assets Crypto assets pose a risk to the global economy due to their unique technological and economic characteristics. Effective investor protection regulation is essential to build trust in markets like India, which is at the forefront of global crypto asset adoption. Like other G20 countries, India must balance the need to protect investors with the desire to foster innovation in this rapidly evolving sector.

The Indian government has had to grapple with the complexities of regulating crypto assets, or virtual digital assets (VDAs) as they are known in India. After considering an outright ban, India has since recognized the global nature of the crypto asset market and the need for a coordinated international response. G20 PresidencyIndia has assumed a leading role in promoting a collaborative global regulatory framework to address inter-jurisdictional challenges posed by free trade agreements.

A recent article from Indian Council for Research in International Economic Relations (ICRIER) Cryptoasset regulatory choices for consumer protection underscore the need for the Indian government to leverage international experience and work towards harmonized global regulation for this asset class. While close industry collaboration is essential for market evolution, it is no substitute for robust government oversight.

Key developments in VDA regulatory framework in India

• Taxation of VDA:India has introduced income tax laws to recognize gains from crypto asset transactions, bringing them under the purview of the income tax law.

• Anti-money laundering measures:The Prevention of Money Laundering Act (PMLA) now covers VDA transactions, requiring VDA service providers and wallets to conduct customer due diligence and register with the Financial Intelligence Unit, India (FIU-IND).

• Regulatory sandbox:The Reserve Bank of India’s enabling framework for regulatory sandbox allows testing of blockchain technologies, although it currently excludes crypto-assets and associated services.

Despite these advances, a global regulatory framework for crypto-assets remains difficult to put in place. However, the government has indicated its preference for a globally harmonised approach. This was highlighted in its chair’s note at the G20 for the IMF-FSB synthesis document, recommending:

• Establish a global coordination framework for the regulation of cryptoassets.
• Developing standards for stablecoins and uncollateralized cryptoassets.
• Improving cross-border payments and addressing financial stability risks.

The way forward: self-regulation and global cooperation

To fully harness the potential of crypto assets while mitigating risks, India needs to actively work with its G20 partners to implement these recommendations. At the domestic level, the government should consider allowing self-regulation of responsible and compliant Indian players, as this could foster innovation while ensuring investor protection. As a first step towards self-regulation, the leading Web3 and VDA industry body – the Bharat Web3 Association (BWA) – of which CoinSwitch is a founding member, has issued two sets of voluntary guidelines – one on consumer protection and the other on token listing. Others will follow. Additionally, it will be crucial to reconsider the tax treatment of VDAs in the July 2024 Union Budget:

• Reduce the TDS rate on VDAs:Reduce TDS rate on transfer of VDA from 1% to 0.01% under Section 194S to bring majority of VDA transactions under the tax monitoring mechanism, to improve tax compliance and prevent capital flight.
• Allow compensation for losses:Allow the offsetting of losses as in other sectors to encourage responsible business practices and reduce the risks of tax evasion.
• Review the 30% flat tax rate: Review the 30% flat rate applicable to income from the transfer of VDA to ensure parity with other technology sectors.

As the global regulatory landscape for crypto assets evolves, India’s leadership in this space will be crucial. By striking the right balance between regulation and innovation, India can position itself as a hub for responsible crypto asset development and contribute to creating a more stable and inclusive financial system.

(The article is attributed to R Venkatesh, Senior Vice President of Public Policy, CoinSwitch)

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