Crypto Quill

India’s stance on cryptocurrencies has remained unclear for years, creating a complex landscape for investors and regulators. With the global rise of virtual digital assets like Bitcoin, which have seen substantial value increases, the conversation is shifting. However, India still lacks a comprehensive policy to regulate these digital assets, raising concerns about investor protection and future economic growth in the sector.

Current Regulatory Landscape in India

Despite the Supreme Court lifting the Reserve Bank of India’s (RBI) ban on cryptocurrency transactions in 2020, India remains in a regulatory grey area. While cryptocurrencies are not explicitly banned, no clear framework has emerged to govern their use or transactions. The RBI has issued various advisories cautioning banks about crypto dealings, but it has stopped short of outright prohibition. The government’s ongoing hesitation to regulate the sector has kept the industry in limbo.

The ambiguity is further compounded by the misconception surrounding the Central Bank Digital Currency (CBDC). Some have conflated CBDCs with cryptocurrencies, but the two are fundamentally different. A CBDC is a digital form of a country’s official currency, with no fluctuation in value, unlike cryptocurrencies, which can gain or lose value rapidly. This distinction underscores the need for clear policy to manage digital assets.

A Growing Market, Yet No Clear Oversight

The global cryptocurrency market has exploded, with trade volumes reaching $6.6 billion in India by 2024. While this market is growing, it is doing so without adequate oversight. The lack of a formal regulatory body means that crypto exchanges in India are often only registered with the Financial Intelligence Unit (FIU) for cross-border transactions, not for comprehensive regulation. Without proper guidelines, exchanges operate without being required to adhere to essential norms like Know Your Customer (KYC) or Anti-Money Laundering (AML) practices, raising concerns about security and transparency.

The absence of regulation also allows for questionable practices, such as data storage outside blockchain systems, which increases the risk of fraud and money laundering. Investors are left vulnerable, as they lack recourse in the event of scams or mismanagement. Furthermore, the lack of a regulatory framework hampers India’s ability to attract institutional investors who may be wary of entering an unregulated market.

The Global Push for Crypto Regulation

Internationally, nations are moving toward establishing clearer regulations for digital assets. The European Union’s Markets in Crypto-Assets (MiCA) framework, for instance, provides a systematic structure to ensure investor protection and prevent illicit uses of cryptocurrencies. Similarly, the United States has taken significant steps, with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) taking charge of crypto-related matters. These efforts aim to regulate the market as an asset class, offering clearer rules for both investors and crypto companies.

Other countries have adopted similarly progressive approaches. Japan, for example, has classified cryptocurrencies as legal property under its Payment Services Act, mandating exchanges to register with the Financial Services Agency (FSA) and adhere to AML and Counter-Financing of Terrorism (CFT) standards. Canada has gone a step further by approving Bitcoin exchange-traded funds (ETFs), making it easier for traditional investors to participate in the cryptocurrency market.

India’s Crypto Taxation and the Need for Regulation

In India, cryptocurrencies are taxed, but there is no comprehensive legal framework governing them. Investors are subject to a 30% flat tax, with additional surcharges on crypto investments, as well as a 1% tax deduction at source (TDS). However, this approach is seen by some as a move to limit the volume of crypto transactions and discourage mass adoption. The lack of regulation in this space has led to a surge in peer-to-peer (P2P) transactions, which do not fall under the tax regime, creating a breeding ground for scams.

Recent incidents, such as the WazirX fiasco, have highlighted the risks of trading on unregulated platforms. Investors are left unprotected, and the legal framework surrounding crypto exchanges remains weak. In the absence of clear regulations, crypto exchanges are left to operate in a manner that is often inconsistent with best practices. This lack of regulation and oversight is stifling innovation in India’s burgeoning Web3 and blockchain ecosystem.

The Case for Urgent Regulation

India cannot afford to continue ignoring the need for a formal regulatory structure. Cryptocurrencies are not just speculative investments; they are emerging as a legitimate asset class. As global investors flock to crypto markets, India risks being left behind if it doesn’t act swiftly. A failure to regulate could also result in the loss of economic opportunities, as other countries that have embraced crypto regulation are already reaping the benefits.

The need for clear regulation is becoming urgent. Without it, India will continue to follow the lead of other countries, rather than establishing itself as a leader in the global crypto space. As with the early days of the internet and Web2, India risks missing the boat if it doesn’t take action now.