The Corporate & Commercial Law Society Blog, HNLU

Tag: Cryptocurrency

  • RBI’s Electronic Trading Platforms: a Bittersweet Take on Trading

    RBI’s Electronic Trading Platforms: a Bittersweet Take on Trading

    BY ABHISHEK KAJAL, FOURTH YEAR STUDENT AT IIM, ROHTAK
    Introduction

    The Reserve Bank of India (RBI) introduced the 2024 framework on Electronic Trading Platforms (“ETPs”) in April 2024 (“2024 Draft Framework”), superseding the earlier 2018 Direction (“2018 Framework”) with some key changes.

    As defined by the RBI, an ETP means any electronic system, other than a recognised stock exchange, on which transactions in eligible instruments are contracted.It is a platform that allows trading in eligible instruments as notified by the Reserve Bank of India. The main instruments include Government Securities (“G-Sec”), Money instruments, and Foreign Exchange instruments.

    No individual or organisation, whether local or foreign, is permitted to run an ETP without first securing authorisation or registration from the RBI. A resident person under the Foreign Exchange Management Act, 1999 (“FEMA”) is allowed to do online forex transactions only on authorised ETPs by the RBI. The purpose of this blog is to analyze the Indian ETP framework by tracing its evolution, examining key regulatory changes in the 2024 draft, highlighting challenges faced by domestic platforms, and suggesting practical solutions to strengthen the framework.

    Evolution of ETPs in India

    After the global financial crisis, trading on electronic platforms was being encouraged in several jurisdictions, driven primarily by regulatory initiatives to reform Over-the-Counter (“OTC”) derivative markets through a technology-driven approach. 

    Therefore, to have more market access, increased competition, and reduced dependency on traditional trading methods, the RBI, in 2017, issued a Statement on Developmental and Regulatory Policies as a part of its fourth bi-monthly Monetary Policy Statement 2017-18, where it highlighted its intention, for the first time, to regulate the money markets instruments under their purview through ETPs.  They recommended a framework to be put in place for ETPs that will deter market abuse and unfair trading practices, leading to better price discovery and improved market liquidity. Following this, the ETP Direction was first introduced in 2018.

    More Flexibility in Trading

    Under the 2018 framework, only banks were excluded from the framework’s applicability given that they allowed trading of eligible market instruments only with their customers on a bilateral basis and did not trade with market makers, including authorised dealers under FEMA.

    However, under the 2024 framework, the RBI has expanded the relaxation of this framework. Now, scheduled commercial banks (“SCB(s)”) and standalone primary dealers are also excluded from the framework for trading in eligible instruments. They can operate ETP platforms and trade in eligible instruments even without the authorization of the RBI, given that the SCB or primary dealer is the sole provider of price/quote and is a party to all the transactions of the platform.

    Certain reporting requirements have been provided for the SCBs or primary dealers, where they have to report any data or information whenever asked by RBI, and further, to avoid any misuse, the RBI can require such ETPs to comply with the ETP Direction. This change by the RBI reflects a balance between promoting ease of doing business and ensuring market protection in the ETP market.

    Setting up and Authorisation of ETPs

    To establish itself, an ETP must meet specific eligibility criteria for authorization from the RBI. The criteria are dynamic, beginning with the basic requirement that the ETP must be a company incorporated in India. Then, the ETP must comply with all applicable laws and regulations, including those of FEMA.

    The ETP or its Key Managerial Personnel (“KMP”) must have at least three years of experience in managing trading infrastructure within financial markets. This requirement serves as a preventive measure against potential market collapses. The ETP must have a minimum net worth of ₹5 crores at the outset and must maintain this net worth at all times. The ETP must have a robust technology infrastructure that is secure and reliable for systems, data, and network operations. All the trade-related information must be disseminated on a real-time or near real-time basis. Once an ETP meets the eligibility criteria, it must submit an application to the RBI in the prescribed format to obtain authorization.

    Offshore ETPs: Opening Doors for Cross-Border Trading

    The background of offshore ETPs is closely linked to the rising incidents of unauthorized forex transactions in India. In response, the RBI has periodically issued warnings against unauthorized platforms engaged in misleading forex trading practices and has maintained an Alert List of 75 such entities.

    The reason for such unauthorized practices lies in the previous 2018 framework, where a significant barrier for offshore ETPs was the requirement to incorporate in India within one year of receiving RBI authorization. This regulation proved challenging for foreign operators, leading to their non-compliance. Under the 2024 draft framework, foreign operators are now allowed to operate from their respective jurisdictions, however, they need authorisation from the RBI.

    The authorization process involves adhering to a comprehensive set of criteria aimed at ensuring regulatory compliance and market integrity. To qualify, the offshore ETP operator must follow some conditions, which include incorporating it in a country that is a member of the Financial Action Task Force (“FATF”). This will enhance the transparency and integrity of Indian Markets. It ensures adherence to global standards in combating money laundering and terrorist financing. This can enhance the overall credibility of India’s financial markets, making them more attractive to global investors.

    Then, the operator must be regulated by the financial market regulator of its home country. This regulator must be a member of either the Committee on Payments and Market Infrastructures (CPMI) or the International Organization of Securities Commissions (IOSCO), both of which are key international bodies that promote robust financial market practices and infrastructure. Once an offshore ETP operator meets these criteria, they must then follow the standard ETP application process for registration with the RBI.

    While analyzing this decision of the RBI, it is a promising initiative. The reason is that it does serve the purpose for which it was intended to be implemented, i.e., preventing unauthorized forex trading. The fundamental issue of unauthorized forex trading was about mandatory incorporation or registration in India, which has been done away with.

    Further, the framework specifies that transactions on these offshore ETPs can only involve eligible instruments that include the Indian rupee or rupee interest rates, and these transactions must strictly be between Indian residents and non-residents.

    Transactions between residents are not permitted under this framework, which indicates that the offshore ETP serves a cross-border trading function rather than facilitating domestic transactions. This is the right step in increasing Foreign Portfolio Investment in India and ensuring risk mitigation that may arise by allowing offshore ETPs to allow transactions among Indian residents.

    The Domestic Game

    However, when it comes to domestic ETPs, the 2024 draft framework is not very effective, the reason being that they do not incentivize domestic operators to apply for authorization. To date, over a span of six years, the RBI has authorized a total of only five ETP operators, one of which is the Clearing Corporation of India and four other private players.

    The reason for such slow adoption is that the operators are ineligible to apply for authorization due to stringent eligibility criteria (Regulatory Restriction). For example, the general authorization criteria for an ETP require that the applying entity or its Key Managerial Personnel must have at least three years of experience in operating trading infrastructure in financial markets. The issue here is that the requirement focuses solely on prior experience in operating trading infrastructure. This effectively limits eligibility to entities already active in this space, leaving little to no opportunity for new entrants to participate and innovate in the ETP market.

    This missed opportunity to foster domestic competition and innovation could limit the full potential of ETPs in India. Therefore, the RBI should take a liberalized approach towards domestic ETPs and ensure that the domestic ETP climate is conducive. To address this, the RBI should broaden the eligibility criteria to allow entities from other financial sectors, not just those with experience in trading infrastructure, to apply for ETP authorization. To ensure market safety, this relaxation can be balanced by imposing stricter disclosure requirements on such entities.

    A phased approach could also be taken by RBI where it could require new players with insufficient experience to first test their platform in the regulatory sandbox operated by RBI and then after rigorous testing, the same could be granted authorization. This will allow more domestic players to participate and will lead to enhanced forex trading in India which will potentially increase FDI investment in India.

    Way Forward

    Another potential change to increase the adoption rate of domestic ETPs might include examining and changing the eligibility requirements. Tax exemptions or lower net worth (less than 5 cr.) entry with certain restrictions could be considered to attract more participants, improving the entire market environment and addressing the low adoption rate found under the existing framework.

    The inclusion of offshore ETPs to register and operate in India has been the most favorable move towards facilitating foreign investment in India. The sturdy registration process ensures that only serious firms join the Indian market, which sets the pace for a market overhaul. The exclusion of scheduled commercial banks and standalone primary dealers is also a significant step forward in simplifying banking operations and increasing FPI.

    Finally, the 2024 Draft ETP Framework may be favorable to foreign ETPs, but the game is not worth the candle for domestic ones. With continued advancements and strategic enhancements, as suggested, India’s ETP framework has the potential to drive significant economic growth and elevate its position in the global financial landscape.

  • Cryptocurrency Taxation: Pigouvian Taxation Does Not Solve The Problem Of Tax Evasion

    Cryptocurrency Taxation: Pigouvian Taxation Does Not Solve The Problem Of Tax Evasion

    By Manas Agarwal, a fourth-year student at NLSIU Bangalore

    Introduction

    Cryptocurrency (‘crypto’) is an ideal example of the intersection between finance and technology. This is because technology makes crypto decentralized and unregulated, which gives rise to finance-related concerns. One such concern is taxation, and this is precisely the backdrop against which this article is set. The focal point of this article is the taxation of crypto that was put forth in the Union Budget of 2022-2023 (para 131). Consequently, the Finance Act, 2022 amended the Income Tax Act, 1961 (‘ITA’), with effect from April 1, 2022.

    Structurally, the article is divided into two parts. First, the author will critique the scheme of taxation of crypto prescribed under the ITA. Further, the author will flag some definitional issues in the present scheme of taxation. Second, the author will employ the law and economics framework of analysis to argue that the true purpose behind the present scheme of taxation is deterrence through negative externalities. Consequently, the author proposes to argue that the present scheme of taxation for cryptocurrencies is not sound either from a revenue maximization perspective or from the standpoint of addressing a negative externality.

    Issues pervading the taxation of crypto under the ITA

    The Finance Act 2022 inserted four components in the ITA:

    • The definition of Virtual Digital Assets (‘VDAs’) under Section 2(47A) of the ITA.
    • An explanation clarifying that VDA shall come under the definition of ‘property’ – section 56(2)(x) of the ITA.
    • Imposition of 30% tax rate on transfer of VDAs – Section 115BBH of the ITA.
    • Tax will be deducted at source for payment of consideration for the transfer of VDAs – Section 194S of the ITA.

    All these provisions pose policy challenges, including an increase in compliance costs. Compliance costs cover all costs that a taxpayer, as well as a third party, has to bear to comply with the tax law and other requirements of the tax authorities. Section 115BBH imposes a flat rate of 30 percent on the transfer of VDAs. This leads to an increase in compliance costs as; firstly, a flat tax rate obliterates the distinction between income from capital gains and business income. Under the ITA, the former is charged at a lower rate. However, in the new tax regime, a person will not be able to seek the benefit of a lower tax rate. Secondly, Section 115BBH does not allow setting off the loss from the transfer of VDAs against any other income.

    Additionally, Section 194S mandates every person (except those exempted) paying consideration in exchange for crypto to withhold tax at 1%. First, ‘Specified persons’ is one category that has been given certain exemptions from the section. Though the criteria to identify a specified user are elaborated on in the explanation, further information is required to assess who meets those criteria. This will increase compliance costs and also result in a decline in trading volume since users will stop dealing in crypto due to anonymity concerns. Second, the compliance costs will be significant in crypto-to-crypto transactions. This is because, a plain reading of the section suggests that firstly, both parties will have to deduct tax at the source, and secondly, the fair market value of the crypto will have to be ascertained to deduct the tax at the source.

    The real purpose behind the taxation of crypto is that of establishing control over virtual digital assets

    In this segment, the author, using different theories of taxation, argues that the government wishes to disincentivize crypto trading and crypto investment.

    i.   Tax as Revenue Maximization

    The first view reflects the traditional theory of taxation, which advocates that the purpose of taxation is revenue maximization so that public funding activities can be financed.[1] Hence, this view will advocate that due to the large trading volume of crypto, it can serve as a good source of revenue. However, if revenue maximization is the purpose, then the existing scheme of taxation of crypto is not optimal. This can be understood through Adam Smith’s canons of taxation. The second and third canons, the canons of certainty and simplicity, state that the levying of taxes should be certain, non-arbitrary, and convenient for the taxpayer (pages 36-37). Moreover, the fourth canon states that the difference between the amount in the public treasury and the amount recovered as tax should be minimal (pages 36-37). In other words, costs such as the salary of tax officers, the costs of legislation, etc. must be minimal. Net revenue equals administrative costs and compliance costs subtracted from gross tax revenue.[2]

    As mentioned above, the prohibition on setting off losses from crypto (Section 115BBH) and the onerous Tax Deducted at Source (‘TDS’) requirements (Section 194S) increase the compliance cost. Furthermore, vagueness in the definition of VDAs and a lack of a coherent mechanism for the valuation of fair market value will increase the administrative costs of litigation, appeals, and explainers. Hence, the goal of revenue maximization will remain unachieved because of the high compliance costs.

    ii.  Tax as Negative Externality

    The central argument of Modern Monetary Theory is that sovereign governments face resource constraints, not financial constraints. Hence, the theory advocates that the traditional mechanism of first imposing taxation and then spending on public financing is outdated and works only in times of commodity-based money. With the introduction of fiat money, there is now a mechanism in which the government spends first and imposes taxation later.[3] This is because, unlike non-state actors which use the currency, the state issues it. Hence, revenue maximization is not the sole purpose of taxation.

    One such purpose is Pigouvian taxation. Pigouvian taxation is used to minimize the deadweight loss in cases where the society faces a deadweight loss due to the private cost being less than the external cost. For instance, pollution imposes external costs on society that are not borne by the private actor, the polluter. Hence, a tax is imposed on the polluter to ensure that, while deciding how much to pollute, the polluter internalizes the external costs (for example, carbon tax, plastic tax)[4]. The author argues that the present system of crypto taxation is an example of Pigouvian taxation.

    The Indian regulatory landscape has been hostile towards crypto. For instance, Section 8 of the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 states that direct/indirect mining, generating, holding, selling, dealing in, disposing, and issuing are declared offenses and can have penal consequences. Furthermore, all these offenses are non-bailable and cognizable in nature (sections 8(1) and 12(1). However, this staunch opposition does not extend to Central Bank Digital Currency (‘CBDC’), which is a digital token recognized as a legal tender (para 111). The exclusion of ‘Indian currency’ from the ambit of section 2(47A) of the ITA saves CBDC from falling within the definition; otherwise, it would have also been treated as a VDA under the ITA. This is because even private digital currencies fulfill the three roles of money (store of value, medium of exchange, and unit of value). Hence, the elephant in the room is not the ‘digital’ nature of private crypto but the lack of government control over it. This happens because; first, unlike CBDCs, private crypto is not easily traceable, and hence monitoring, reporting, and surveillance is difficult, and; second, unlike CBDCs, crypto operates independently of financial intermediaries such as banks, as crypto is only dependent on the demand and supply in the market (pages 38, 42). Hence, the central bank loses control in addressing concerns such as inflation because crypto is independent of the monetary measure of interest rates.

    The government will justify control through taxation because decentralization and (pseudo) anonymity present in the crypto transaction make crypto a tax haven. Furthermore, there have been numerous instances of crypto being used to finance terrorist activities and in money laundering. Therefore, people who illegally deal in crypto impose external costs on society (if there is an increase in criminal activities and the focus of the State is on preventing such activities, then there might be a resource crunch due to which the welfare activities of the State are compromised). Hence, a high tax rate will act as a deterrent, and the external costs due to crime will be internalized. Therefore, crypto taxation represents a Pigouvian tax.

    However, characterizing crypto taxation as a Pigouvian tax by itself is insufficient. This is because a cardinal principle of taxation is neutrality. It means that taxation should not be used to distort consumer choices, and consumers should be allowed to make a decision based on welfare and/or economic reasons. However, one might argue that Pigouvian acts as an exception to neutrality since it establishes an equilibrium between private costs and social costs. Though this is true, the exception is not being drawn in the present case. This is because the issues concerning tax evasion, illicit activities, etc., and the imposition of a Pigouvian tax as a solution to these issues do not have a direct correlation. Under the ITA, the prominent mode of filing returns is based on self-assessment (sections 139, 140A) where taxpayers must assess their tax liability themselves based on factors such as (i) income, (ii) taxable income, (iii) head of income, (iv) concessions, (v) exemptions, and (vi) TDS. Self-assessment helps to address the case of crypto taxation because of the anonymity coupled with high compliance costs. Furthermore, techniques of summary assessment, (section 143(1)) regular assessment (section 143(2)), and re-assessment (section 144) are not adequate to receive taxation on crypto because crypto acts independently of banks and financial institutions and posits a cloud of anonymity. Moreover, it can be said that the probability of self-assessment and third-party reporting is indirectly proportional to the compliance costs and directly proportional to the probability of detection of tax evasion. As stated before, compliance costs are high and the probability of detection is low in a crypto transaction, thus, a model of Pigouvian taxation for crypto by itself is not the optimal solution.

    Conclusion

    The present scheme of crypto taxation suffers from various policy concerns. This is because Sections 115BBH and 194S of the Indian Tax Act raise compliance costs, and hence cryptocurrency taxation is not optimal for revenue maximization. Furthermore, using crypto taxation as Pigouvian taxation is not helpful, because the issue of tax evasion, illicit activities, and the solution of levying a Pigouvian tax, do not have a direct correlation. This is further aggravated by the low probability of detection because of self-reporting. Hence, (a) the present taxation of crypto under the ITA does not solve the fintech issue of tax evasion due to anonymity inherent in the technology used in crypto and (b) the taxation of crypto does not achieve the goal of either revenue maximization or Pigouvian taxation.

    [1]Beverly I. Moran, ‘Taxation’ in Mark Tushnet, and Peter Cane (eds), The Oxford Handbook of Legal Studies (OUP 2012) 377.

    [2] ibid.

    [3] L. Randall Wray, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (2nd ed, Palgrave Macmillan 2015).

    [4] ‘Environmental Taxation’ in James Mirrlees (ed), Tax By Design (OUP 2010)231.

  • Cryptocurrency: A Revolution in the Making

    Cryptocurrency: A Revolution in the Making

    By Aayush Jain and Devansh Parekh, fourth year law students at GLC, Mumbai.

    Introduction

    On 21st April, 2021, for the first time ever, a completely paperless trade transaction between Tata Steel and HSBC India was executed using blockchain technology. The genesis of the technology which enabled this transaction can be traced back to 2008, when a pseudonymous white paper was uploaded online, which envisioned a new way to transfer value over the internet – and thus commenced the era of cryptocurrencies, blockchain and Bitcoin. While they pose significant controversy, fear and caution, cryptocurrencies have attracted immense interest from businesses, consumers, monetary authorities and governments across the world, as they have a promising future to replace the need for the trust in long-standing institutions such as banks.

    The Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 defines cryptocurrency in a broad manner as, any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in a business activity, or acts as a store of value, or a unit of account. A more comprehensive definition has been given by the Financial Action Task Force as a math-based decentralized, convertible virtual currency which is protected by cryptography.

    Potential Uses

    Companies across the globe have begun raising capital through initial coin offerings – where the company sells cryptocurrency either for money or for another cryptocurrency. The time frame and the costs are greatly reduced when compared to a regulated Initial Public Offering. Another important characteristic associated with initial coin offering is that they do not come with voting rights. Today, crypto assets boast a combined market capitalization of over $1.75 trillion.

    Could we have ever imagined a completely paperless transaction? Just as it was hard to guess in the early 1990s how the internet would help sell products across the world, an attempt to precisely understand the use of blockchain technology today is challenging. The advantages and disadvantages vary depending on the nature of the transaction. This nascent technology has several characteristics as discussed below.

    Instant, Low-Cost, Secure Settlement: Crypto-assets, such as Bitcoin, solve the problem of counterparty risks by creating a single, decentralized distributed database, accessible to everyone, but controlled by no single entity. The technology has the potential to bring about safe, real-time trade verification and settlement, through simplification of administrative processes in settlement, which has the ability to handle high volumes at low costs. Since all parties agree on a single database, without the presence of a financial intermediary, transferring money from one account to another is effortless, cost effective and quick as against a banking transaction that would otherwise require confidence that the payment would happen risk-free. The presence of a more secure payment mechanism has the potential to improve access to credit.

    As per a recent report by the innovation fund of Santander Bank, blockchain technology would result in a cost-savings of USD 15 to 20 billion by 2022 as it reduces financial infrastructure costs and time period for the transactions, as compared to traditional transfer of money, which can be done only during banking hours which would take at least a day or two with fees ranging from 1% to 8%.

    Tokenization: Cryptocurrency has a convenient way of tackling the problem of counterfeiting and fraudulent transactions. Tokenization involves maintaining a record of ownership of physical assets in a secure electronic manner. The only way for someone to ‘own’ a digital asset was if a trusted third party recorded the ownership in a database. Because the database is accessible by everyone and controlled by no one [also called permissionless network], crypto assets can provide ownership guarantees that were previously non-existent in the digital world Therefore, the risks arising from a controlling third party are eliminated. For example, blockchain could provide specific financial services without the need of a bank through distributed ledgers. In fact, one could argue that cryptocurrencies have more secure record-keeping capabilities, providing better ownership assurances, than most of the physical ones, while providing an efficient cross-border payment system.

    Smart Contracts: Other potential applications in finance include smart contracts – electronic contracts that are designed to execute automatically upon fulfilment of terms as agreed to by the counter-parties. For example, an options contract could be set up to be exercised automatically if certain defined conditions exist in the market. Such a ledger could potentially replace the paper real estate deeds currently filed at government offices.

    Key Issues and Analysis on India’s Stance towards Cryptocurrencies

    “Why ban when you can regulate?” New possibilities of cryptocurrencies are being discovered as the trading and usage increases day by day. As recent as March 2021, the Finance Ministry made it clear that it has no intentions of banning cryptocurrency in its entirety after witnessing several benefits of fintech and its dependance on blockchain technology. Interestingly, to battle the COVID-19 pandemic, the Government of Maharashtra has been using blockchain technology to store and maintain COVID-19 test results.  .

    In 2018, the Reserve Bank of India (“RBI”) materialized a circular (“RBI circular”) which required all entities within its purview to stop dealing in cryptocurrencies and rendered it illegal to initiate any such dealings or services in cryptocurrencies.

    Amidst concerns of high volatility and risky venture, what perturbed RBI the most was the anonymity of transactions. This raises significant concerns for consumer protection. No Indian regulation specifically targets cryptocurrencies. They have no sovereign guarantee and are of a speculative nature, hence making them very volatile. For instance, Bitcoin lost nearly 80% of its value between December 2017 and November 2018. Interestingly, recently Elon Musk and his tweetshave made some important headlines that led to  fluctuation in rates of certain  cryptocurrencies like  Bitcoin and Doge to the sky and back to the ground. The essence of money has always been to trust in the strength of its worth.

    Another particular concern with cryptocurrencies is that private keys (a ‘key’ which allows access to a user’s cryptocurrency) are stored by cryptocurrency exchanges, which are prone to hacking, malicious activities, human errors or operational problems of exchanges. On 22 April 2021, one of Turkey’s largest cryptocurrency exchanges had to cease operations due to lack of financial strength, leaving hundreds of thousands of investors in panic as their savings worth $2 billion would evaporate.

    Since cryptocurrencies are pseudonymous and decentralized, they could facilitate money laundering and other illicit criminal activities (such as tax evasion), providing a means for criminals to hide their financial dealings from authorities. It also raises the issue whether existing regulations can appropriately guard against this possibility. 

    If cryptocurrency becomes a widely used form of money, it could affect the ability of central banks to implement and transmit monetary policy in the country.

    The RBI circular aims to tackle the above issues by temporarily holding off trading in cryptocurrencies until a suitable legislation is enacted. However, the same was challenged and struck down by the Indian Supreme Court declaring it a violation of fundamental rights vested in Article 19(1)(g) of the Constitution of India. The Court applied the test of proportionality and concluded that RBI failed to consider the availability of least-restrictive alternatives. It must be noted that though the Supreme Court rejected the RBI Circular on the ground of proportionality, it does not rule out the presence of other risks that come along with this order.

    Conclusion

    The entire growth and foundation of Financial technology (“Fintech”) lies upon the initiative of a Sandbox. The United Kingdom and its regulatory body, the Financial Conduct Authority commenced this to reduce time and cost to get ideas to market, enable greater access to funding for innovators and allow more products to be tested and introduced in the market. Arizona was the first state to adapt this in the USA.

    Although growing at an exceptional speed, the fintech industry is still young. This has put some pressure on the regulators to adapt to the inevitable changes time and again. For instance, the USA has a fragmented structure of regulations that govern fintech. The Initial Coin Offering must fulfill the Howey Test in order to be regulated by the SEC. There is not one but several rules and regulations differing from state to state that govern Fintech in the USA. The State Licensing Requirements ensure that there are annual audits, record keeping as well as examination by regulators. Some of the recent initiatives include: In 2015, New York State Department of Financial Services approved the NY BitLicense that issues business licenses for virtual currency activities. In 2017 the Uniform Law Commission released the Uniform Regulation of Virtual Currency Businesses Act that ascribes certain extensive requirements for a virtual business currency to adhere to before it can engage in business activities with the residents of the state. Even though this act has not been enacted by any of the states so far, it is an exhaustive framework that details the transfers, exchange, definitions, licensing and other requirements as well as potential liabilities that can be enacted in the future.

    As it stands, there is an urgent need to provide clarity on the status of cryptocurrencies. India is working on its own law to regulate cryptocurrencies. However, the approach taken is severe, even more stringent than China. It would be interesting to see where India takes the project of Digital India from here on. If the draft cryptocurrency bill is passed, India would be first prominent economy to ban any form of engagement with cryptocurrency – including its mining. 

    Like other nations, India should regulate rather than ban cryptocurrencies. The aim should be to develop industry standards, promote transparency, work with regulators to detect fraud and misconduct. Crypto firms in India have experienced a successful phase during the pandemic as the volume of trading on crypto exchanges increased manifold. There is an increased inclination towards accepting cryptocurrencies. Around the world, companies such as Starbucks, Visa and Microsoft now accept certain cryptocurrencies as payment for their products/services. Although the crypto market is highly volatile in nature, regulators can introduce margins, limits, circuit breakers as well tax the transactions to ensure open competition in the market.

    It is well established that the nature of the cryptocurrencies is evolving continuously in the global economy. Due to its increasing acceptance, it should not come as a surprise if India publishes its own set of guidelines or regulations. As to which stand it takes is a question which remains to be answered.