Elon Cat, Spider Cat, Pickle, Dork Lord, Anarchy, Gelato. These names are likely to be unfamiliar to many of us, for these are names of some of the 8,820 crypto assets (also called cryptocurrencies) currently available for trading. Bitcoin, the first crypto-asset, created by the still-anonymous Satashi Nakamoto in 2015, continues to be the most popular, accounting for more 50 per cent of the global crypto market cap of $1.6 trillion.

But the ease with which these assets can be created, by just about anyone, and the total lack of regulatory supervision, has resulted in a virtual boom in these assets. The trouble is these assets go bust at the same speed with which they are created. In March this year, there were over 22,000 crypto assets; more than half have disappeared in the ensuing seven months.

Activity on the 668 crypto trading platforms, is however, quite vibrant. The daily volume on these exchanges is over $85 billion, with participation from traders from all over the world.

Global regulators have been flummoxed about the way to regulate these assets over the past decade given the way the border-less nature of trading and other transactions. The growing need to create a uniform global framework to tackle these assets has led to the IMF-FSB synthesis paper, adopted by the G20 recently.

The paper has laid out a time frame for adoption and implementation of a broad regulatory framework suggested by it, in the member jurisdictions. So, a lot of regulatory action is expected in the Indian crypto asset ecosystem in the next two years. Cryptos could either be brought under SEBI or a new regulator could be created, who will be responsible for framing regulations for overseeing issuance and trading of these assets, investor protection, risk-management and governance in service providers and information sharing with other jurisdictions.

Indian crypto ecosystem

The crypto ecosystem in India is primarily comprised of the crypto trading platforms and fintech companies which take deposits and lend using the crypto assets and provide other investment options. All these activities are currently unregulated.

Crypto trading platforms such as WazirX, CoinDCX, Bitbns, CoinSwitch did brisk business in 2020 and 2021 as bitcoin prices zoomed from $5,000 to $67,000. But the regulatory ban on cryptos by China, tighter global liquidity and high taxes levied in India made prices decline over 73 per cent by November 2022. Indian crypto trading volumes too crashed in tandem.

There have been reports of FEMA violations by some crypto platforms in recent years and these companies have been brought under the PMLA in March 2023.

The IMF-FSB paper

The functioning of crypto service providers in India will undergo a sea-change once the guidelines in the IMF-FSB synthesis paper are adopted. The paper lays out the broad regulatory framework and for crypto asset activities; regulators in each jurisdiction can enforce other more stringent rules depending on the extent of risk in domestic economies. There will also be a drive to make countries beyond G20 adopt these regulations.

What does the synthesis paper mean for Indian crypto platforms and services?

The paper is not advocating a complete ban on mining, issuance, and trading in crypto assets. It is instead making it imperative that the relevant authority to supervise these activities should be identified first. Complete ban is suggested only if the risk of capital outflows or systemic risk to the domestic financial system is too high. Regulators can also consider ban on transactions in selective crypto assets originating from a high risk country such as China, in case of geopolitical compulsions.

Now, identifying the regulator for crypto assets in India is going to be tricky since both RBI and SEBI are reluctant to take on the job. Since these assets can be used as an alternative to rupee, and can destabilise capital flows and external account, RBI must be involved in some respects. SEBI oversees stocks and derivatives of stocks, commodities, and currencies. But these securities are very different from crypto-assets and the learnings from the existing stock market activity cannot be applied to crypto trading platforms.

A new wing may have to be created under SEBI to deal with cryptos or new regulator with representatives from RBI and SEBI may have to be created as a first step in implementing the IMF-FSB paper. This must be done fast as the regulator will then have to frame guidelines for,

* The eligibility for registering as crypto-asset platforms, service providers and issuers, disclosure requirements, governance frame-work and risk-management systems for the players in this space.

* Awareness programmes and disclosures to be made to investors and users of crypto-assets in the country.

* Identifying links between the crypto-ecosystem and conventional financial system and implementing checks in these areas.

* The crypto-regulator needs to examine the business models of the service providers. Some of them combine lending and deposit taking activities which fall under the purview of RBI. There are others who were promising guaranteed returns. The regulator will need to decide if these activities can be allowed to continue or stopped.

* Channels for regular information flow from the service providers to the domestic and international regulators will have to be created.

Legal changes

The paper is emphatic that there should not be any ambiguity in the law regarding the crypto-assets. It states, “In some jurisdictions, it may be important to clarify the application of existing laws or assess the need for new ones.”

In case of India, Securities Contracts Regulations Act can be altered to include crypto assets under the list of securities covered. But given the vastly different set of users and nature of the product, new regulatory framework for crypto assets may have to be created by the new regulator. The crypto-asset service providers will also have to meet FATF standards in maintaining documents and sharing it with all authorities and reporting suspicious transactions to the authorities.

As regulators work around the clock to set up the rules, crypto service providers will have to decide whether they want to continue functioning under stringent supervision. The users will be the major beneficiaries as they can continue to use or trade in these assets, but in a safer environment. RBI will also be at peace once the supervisory framework for these assets is established.

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