The spectacular collapse of a large crypto asset exchange in 2022 and the subsequent whirlwind trial and conviction of its founder; the crash of a prominent crypto-friendly bank in the US; and the recent unprecedented multi-billion dollar penalty on the largest crypto asset exchange in the world for criminal compliance violations, hogged global crypto headlines in 2023.
These dramatic developments in the cryptoverse were met with an equally urgent and vigorous reaction from governments, policymakers and regulators. Many countries and jurisdictions, including the EU, the UK, Japan, Singapore, and the UAE took an early and decisive lead to remove regulatory arbitrage and lay the foundations to build a thriving digital assets ecosystem without compromising on consumer protection and innovation.
India, too, played its part in the cryptoverse, globally via G20 Presidency, and locally via a series of regulatory measures.
There was plenty that India unpacked in 2023:
Crypto asset regulatory agenda under G20
Assuming G20 Presidency for the first time, India pursued crypto assets regulations as a key agenda under the Finance Track. One major highlight of the Indian Presidency was widening the scope of the policy framework to consider the macro-financial implications of crypto assets. Consequently, G20 adopted the crypto assets roadmap proposed in the Synthesis Paper put together by the International Monetary Fund (IMF) and the Financial Stability Board (FSB). This detailed and action-oriented roadmap is essential to achieve the common goals of macroeconomic and financial stability, and to ensure effective, flexible, and coordinated implementation of the comprehensive policy framework for crypto assets.
At CoinSwitch, we were instrumental in encouraging the government to use the G20 Presidency as a platform to foster a global debate on crypto regulations, and we were very happy to see India seize that opportunity. Further, we engaged with the Embassies and High Commissions of several prominent G20 members and invitee countries in India, including Germany, Canada, Japan, Australia, Mexico, and Singapore to foster knowledge sharing and find common avenues for collaboration.
On the sidelines of G20, Bharat Web3 Association (BWA), an industry body of which we are a founding member, and Research and Information System for Developing Countries (RIS), under the Ministry of External Affairs, organized a roundtable discussion on ‘Virtual Digital Assets Industry: Evolving Policy and Regulatory Landscape from India and G20 Perspectives’. The roundtable provided a unique opportunity to stakeholders from both the government and the industry to engage in fruitful discussions for the orderly growth and effective regulation of the VDA sector in India.
The CoinSwitch Public Policy team has carefully curated a reading list for all policy enthusiasts to easily access and analyze all important crypto-related documents/reports put out during India’s G20 Presidency.
A framework for AML monitoring and reporting
Our first discussion with the Department of Revenue, Union Ministry of Finance, on the important topic of anti-money laundering (AML) risks in the Virtual Digital Assets (VDA) sector in August 2022 was very productive, and from thereon, in response to requests from CoinSwitch and the industry, the Ministry issued a notification dated March 7, 2023 to bring all transactions involving VDAs under the ambit of the PMLA.
VDAs have been defined under Section 2 clause (47A) of the Income Tax Act, 1961. All entities that deal with VDAs are covered within the definition of Reporting Entities (REs) and are now subject to strict compliances such as undertaking KYC norms of clients and beneficial owners, undertaking due-diligence on transactions facilitated by VDA service providers in relation to VDAs and maintaining transaction related records. The notification was issued in the run up to India’s Financial Action Task Force (FATF) Mutual Evaluation exercise in November 2023, after almost 13 years.
As part of our commitment to transparency and consumer protection, two crypto asset service providers of PeepalCo—Bitcipher labs LLP and Nextgendev Solutions Pvt Ltd—are registered as reporting entities with Financial Intelligence Unit-India (FIU-IND). During the recent Winter Session of Parliament, Minister of State for Finance, Shri Pankaj Chaudhari listed our two entities among the 28 VDA service providers registered with FIU-IND. He also stated that offshore crypto exchanges serving Indian market are also required to register with FIU-IND, failing which appropriate action would be taken for non-compliance under PMLA.
CoinSwitch is also one of the earliest members of the Alliance of Reporting Entities in India For AML/CFT, or ARIFAC. This will enable us to collaborate better with other AML/CFT reporting entities in India such as banks, non-banking financial companies, and payment aggregators to bring more transparency to the industry.
Negative impact of TDS
The 1% tax deducted at source (TDS), together with the 30% capital gains tax and the lack of offset of losses, on trading in crypto assets is having an unintended negative impact not just on the industry but also customers. A recent empirical study highlights how the introduction of TDS has pushed Indian users to trade on non-compliant offshore VDA platforms. It pegs the loss of TDS of Rs 3500 crore between July 2022 and July 2023. These taxation measures also defeat the Government’s intent of discouraging VDA trading, and tracking and tracing VDA transactions.
CoinSwitch has raised these concerns with the Ministry of Finance on numerous occasions. We are happy to note that there is an acute awareness and understanding of this problem within the Ministry. We are committed to working with all stakeholders to moderate the combined tax impact of the TDS, flat 30% capital gains tax and no offset for losses, and are consistently engaging with concerned government stakeholders at all levels on this issue.
Revised ASCI guidelines
The Advertising Standards Council of India (ASCI) guidelines for advertising of VDAs and linked services were first issued in February 2022, at a time when the VDA sector in India was still very nascent. To better reflect the evolving landscape for VDAs in India, we proactively submitted representations to the ASCI to moderate these guidelines. The recommendations made through BWA were accepted by the ASCI, and the revised guidelines have been issued.
At CoinSwitch, we remain committed to responsible and progressive advertising and consumer communication.
Consumer Awareness and Protection are also key focus areas of our Public Policy objectives, outreach and engagement. Toward this end, and to advance this cause, CoinSwitch’s Public Policy team helped curate a first-of-its-kind workshop on ‘Virtual Digital Assets, Web3 and Consumer’, which was organized by the Department of Consumer Affairs (DoCA), Government of India.
Demystifying Web3
During the Winter Session of Parliament, Minister of State for Electronics and IT Shri Rajeev Chandrasekhar reiterated government’s support to promoting Web3. “Web3 represents the future of the Internet and the Government is committed to ensuring that the innovators and innovation from India create the future of Web3 and Internet,” he said in response to a question by one of the MPs.
At CoinSwitch, we are committed to collaborating with the Ministry of Electronics and Information Technology (MeitY) to build a thriving Web3 and blockchain ecosystem. In line with our commitment, we took a lead role in supporting the Bharat Web3 Association (BWA) to co-host a first-of-its-kind workshop on ‘Demystifying Web3’ for MeitY officials in May 2023.
Several Parliamentarians, cutting across party lines, continue to raise pertinent questions around Web3, blockchain and digital assets in both the Houses of Parliament. This is a result of consistent engagement and advocacy to build awareness and understanding of our sector amongst India’s lawmakers.
Capturing the evolving response for different government ministries, CoinSwitch has released a compendium on Parliamentary Q&As. This is intended to serve as a ready reckoner for anyone interested in understanding the gamut of issues surrounding this sector and the discussions underway so far in the Parliament.
In a further indication of the mainstreaming of blockchain and Web3, several State governments too are crafting policies to unlock the potential of Web3 in India. Government of Telangana established a first-of-its-kind Web3 Regulatory Sandbox. The State has also released a Technical Guidance Note for Asset Tokenization. Government of Karnataka at its flagship annual IT event—Bengaluru Tech Summit—hosted a panel discussion on Web3, and reiterated its commitment to support emerging technologies. CoinSwitch and BWA are actively working with key stakeholders in both these States to further the policy agenda.
If 2023 was the year of learning and building, 2024 promises to be a year of action. Brazil, which took over the G20 Presidency from India, has already committed to take the crypto assets regulatory agenda forward.
At CoinSwitch, we remain committed to working with all stakeholders including policymakers and regulators to help shape effective regulations for crypto-assets in India to foster innovation while mitigating risks.
