Cryptos escape ban, to be regulated by Sebi
MUMBAI: The Union government has decided to bring cryptocurrencies under a regulatory framework instead of banning them, two people with direct knowledge of the matter said, putting to rest fears of a Chinalike crackdown on such assets.
Under the proposed law, cryptocurrency will be renamed crypto-asset and brought under the regulatory ambit of the Securities and Exchange Board of India (Sebi), the people said.
Apprehensions about a ban led to in a plunge in the value of cryptocurrencies traded on local exchanges. Following a government notification about the tabling of a bill on cryptos, bitcoin fell more than 13% on the Indian exchange site Wazirx, while Shiba Inu and Dogecoin both dropped more than 15%. They, however, recovered some of their value.
“Categorizing crypto as an asset will ensure that there is no overlap between the digital currency that will be launched by the Reserve Bank of India (RBI) and crypto. All crypto exchanges will come under Sebi’s regulatory ambit. Any violation could lead to monetary penalties ranging from ₹5-20 crore and imprisonment,” said one of the two people cited above.
“The government is going to introduce the bill in parliament in the third week of this session. This will be kept separate from the RBI’S digital fiat bill,” said the second person.
This means that crypto transactions will need to pass through Sebi-registered platforms and exchanges. “There will be a cutoff date prescribed to ensure that all the current exchanges get registered with Sebi,” the first person added.
Bringing crypto platforms under Sebi will ensure that only serious players are in the market, stemming the current phenomenon of mushrooming crypto platforms and potential scams.
“Regulating a trading platform is an indirect way to regulate a digital instrument. Instead of a complete prohibition, this will bring an organized market. However, the challenge will be to formulate and enforce crossborder KYC norms, investor protection mechanism, reporting and taxability to ensure the development of the crypto market for its evolving regulation,” said Sumit Agrawal, founder, Regstreet Law Advisors and a former Sebi official.
While this is a step forward, it does not come without its own set of challenges. Sebi was not keen to regulate crypto because it has no underlying assets.
“How does one ensure settlement in the absence of an underlying,” a Sebi official said on condition of anonymity.
Deepak Shenoy, founder of Capital Mind, an investment management firm, said that not all transactions are recorded on a blockchain.
“There are only one, or a few, wallet addresses, which hold the coin, and customers buy/sell from each other, but that record is only maintained by the exchange. No regulator here. Sebi may have to create a mechanism such that every transaction and every wallet is kept separate with a centralized demat kind of store—so you might have a separate database that is more realtime to store coin ownership,” Shenoy said.
To prevent money laundering, the bill will ensure that certain provisions of the Prevention of Money Laundering Act (PMLA) are also applied.