The Securities and Exchange Board of India (SEBI) has echoed the concerns raised by the Reserve Bank of India on cryptocurrencies. The market regulator has told lawmakers that consumer protection and enforcement of any regulatory regime over crypto assets would be challenging due to the decentralised nature of the digital instruments.

“As crypto assets are maintained in decentralised distributed ledgers, which are nested in computer nodes spread all across the globe, there is a great likelihood of execution of unauthorised trades not in consonance with any regulatory framework,” SEBI has told the Parliamentary Standing Committee on Finance.

Investigating authority

While SEBI has not sought a ban on crypto trading,<SU>it said that “considering the spread of the opportunity to deal with crypto assets, crypto assets related unregulated activities may be entrusted to an investigating authority appointed by the government and take further legal action.”

Securities or not

The market regulator also said that clarity needs to be brought on whether cryptocurrencies can be legally defined as securities. “If crypto assets are not banned, then there is a need for feature-based characterisation of the tokenised version of the assets, which may attract supervision of different sectoral regulators,” it has noted.

The legislative framework, if proposed, would need to delineate the role for different regulators and authorities including for regulation purposes, it recommended. SEBI further pointed out that different regulators currently regulate various entities based on the services and products they offer. There could also be a crypto asset referencing goods or service offered by entities, which are not regulated by any sectoral regulator. Consumers availing such products should be protected through the Consumer Protection Act, 2019, it said.

Possible RBI regulation under FEMA

It also suggested possible regulation of crypto trading platforms by the RBI under the FEMA as crypto assets are available for trading in foreign jurisdiction as well and consumers abroad can remit funds to India using such currency.

“A digital currency acts as a bridge between the fiat currency of the foreign jurisdiction and the Indian rupee,” it noted, adding that such activity is similar to that undertaken by money changers, authorised dealers and forex dealers. “One objective of bringing crypto trading platforms under regulatory purview could be to provide AML /CFT / KYC reporting; the same can be ensured by registration of the entities as money changers, authorised dealers or forex dealers,” it has said.

Even in the US, crypto trading platforms are registered as money transmitters and are required to comply with the Banking Secrecy Act for their AML /KYC requirements. SEBI-regulated stock exchanges would be ineligible to provide a trading platform for these products in the absence of a notification on crypto assets or cryptocurrencies as securities, the market regulator said. “In terms of the definition of a ‘stock exchange’ under Section 2(j) of the SCRA , 1956, a stock exchange can only provide for ‘assisting, regulating or controlling the business of buying, selling or dealing in securities’,” it pointed out.

Consumer protection

As part of customer protection, SEBI had also proposed various measures to the Advertising Standards Council of India.

While the government has introduced a taxation scheme on virtual digital assets, there is stillno clarity on their regulation. The government has also under-scored that the taxation scheme does not make cryptos legal.