India’s Finance Minister has highlighted the importance of technology in the regulation of cryptoassets during a panel discussion hosted by the International Monetary Fund (IMF).
Nirmala Sitharaman told the panel that there were concerns about digital assets in her country and that regulation through technology needed to be nimble: “Regulation using technology is the only answer. Regulation using technology will have to be so adept that it is not behind the curve but be sure that it is on the top of it,” she said.
She highlighted money laundering and terrorist financing (ML/TF) as the biggest risks from cryptoassets, and the main barriers to encouraging and celebrating the innovation it enables. India recently investigated the use of cryptocurrencies by the Al Qassam brigades – the military wing of terrorist group Hamas. In March 2022, a money laundering case involving 80,000 Bitcoins hit the headlines with a conspiracy “hatched by a Singapore-based firm owned by Indians who have footprints in UAE and China”, according to The Times Of India.
The finance minister also stressed the importance of global cooperation, stating that a single country could not effectively regulate the growing sector and that a coordinated international response was needed. Unhosted wallets are a particular concern, enabling illicit cross-border operations to take place anonymously, she said.
Cryptocurrency Growth in India
According to a report by blockchain data platform Chainalysis, India is one of the world’s fastest growing crypto markets, increasing its market by 641% between July 2020 and June 2021. Indians are believed to currently hold cryptoassets worth around $5.3bn.
However, India is known to have a rocky relationship with the crypto industry. In 2018, the Reserve Bank of India (RBI) banned banks and any regulated financial institutions from “dealing with or settling virtual currencies.” In 2020, this ban was ruled unconstitutional and reversed.
The Advertising Standards Council of India also issued guidelines for the advertising and promotion of virtual digital assets in February 2022. This move is similar to other countries in the region such as Singapore’s regulator, the Money Authority of Singapore, which announced new measures in January restricting the ability of Digital Token Providers to promote their services to the general public.
Regulatory Oversight in India
Meanwhile, India’s Cryptocurrency and Regulation of Official Digital Currency Bill, which had been expected to become law in 2022, now looks likely to be delayed. It is thought that more discussions are needed to build consensus on the proposed regulatory framework, as the new law would require amendments to existing legislation.
A fully-fledged taxation framework for the cryptocurrency industry is also thought to still be a work in progress, and legislators may also be waiting for the pilot launch of Reserve Bank of India’s digital currency, which is expected in the coming months.
Taxation is one way that India is tracking who is buying and selling cryptoassets. A 30% tax on cryptocurrency transactions has been added to the Indian Finance Bill, effective from April 2022. It includes a 1% tax deduction at source, which the finance minister says is essential for establishing a money trail.
Media outlet Cointelegraph reported that within weeks of the new crypto tax law coming into effect, trading volume across major crypto exchanges dropped by as much as 90%. This was attributed to traders either moving their funds away from centralized crypto exchanges, or adopting a holding strategy over trading.
Nirmala Sitharaman told the panel that RBI will roll out its Central Bank Digital Currency (CBDC) during the current financial year. The government’s Trend and Progress of Banking in India 2020-21 report revealed that RBI was exploring ways in which an Indian CBDC could provide a safe and effective alternative to cash. The CBDC will be legal tender in digital form and be implemented in a way that promotes financial inclusivity.
International Collaboration on CBDC Interoperability
The IMF’s managing director said during the panel discussion that the body will expand its work on digital money, focusing specifically on CBDC interoperability, the regulation of private digital currencies, and risks from cyberattacks.
Efficiency, transparency, and better management of large payments can be supported through CBDCs – but a global approach and continued understanding of how the technology is evolving is essential, she said. This approach has been supported by central banks in Brazil and Singapore.
More widely, the panel discussion indicated greater activity by international bodies like the IMF to provide cross-government collaboration in specific areas is likely.
Firms operating in India should review the finance minister’s remarks and prepare for additional announcements through 2022 – including a likely CBDC, and legislative progress on the Cryptocurrency and Regulation of Official Digital Currency Bill.
Originally published April 22, 2022, updated May 6, 2022
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