Comprehensive approach

India needs legislation on cryptos

The notification that most cryptocurrency transactions would be placed under the provisions of the Prevention of Money Laundering Act (PMLA) appears to be the next step in piecemeal regulation by the government, which still seems unsure of what it should do about this class of instruments. Under the PMLA, crypto exchanges would have to verify the identity of all clients and maintain records pertaining to the exchange, transfer, safekeeping, and administration of virtual assets, as well as those related to financial services for the past 10 years. This will complicate bookkeeping for crypto companies, without necessarily providing a firewall against the use of these assets in money laundering. Prior to this, the last big regulatory step about cryptos came in the form of an amendment to Income Tax Rules in 2022, wherein crypto profits were subjected to 30 per cent tax. In February 2023, the government also placed a pre-emptive ban on crypto-related ads in the Women’s Premier League matches (crypto ads are banned also in the men’s premier league).

Taken together, these moves have induced crypto traders to move to offshore exchanges and also forced crypto research projects to move outside India. Trading volumes on Indian crypto exchanges have dropped about 90 per cent since the imposition of the tax. The regulatory efforts should tie in with global endeavours to understand and control cryptos. But the government is moving in different directions. This has, however, not stopped traders from experimenting in cryptos. There’s anecdotal evidence that Indian crypto traders have found ways to move operations abroad and the buzz around cryptos on Indian social media certainly hasn’t died down.

At the G20 meeting, Union Finance Minister Nirmala Sitharaman talked about international efforts on comprehending the macro-financial consequences to inform global policy on such instruments. But if India is to take the lead in developing such an understanding and write model legislation, it needs to take a comprehensive approach. This could perhaps be done by empowering a committee with technical experts and members drawn from the Securities and Exchange Board of India, the Income Tax Department, and the Reserve Bank of India. This committee can recommend legislation that covers the whole gamut on treating cryptos — issue, trading, tax treatment, and permitted usage. To be sure, these unique digital assets have significantly influenced the financial landscape. Cryptos may be used for money laundering or to enable various types of cybercrime. They have also been involved in huge frauds-cum-meltdowns such as the FTX affair. The recent run on banks in the US is also being connected to such instruments.

However, the enthusiasm with which these instruments have been adopted by traders around the world also indicates that they addressed pain points in the financial landscape. For instance, cryptos allow for cheaper and faster fund transfers across borders. Central banks should be looking at this with a view to imparting more efficiency to normal remittance processes. The underlying technology like blockchain can also be adapted for other useful purposes and, indeed, India encourages research on alternative uses of blockchain. Therefore, it is important that the current ad hoc approach is replaced by comprehensive legislation that addresses all aspects of these new-age digital instruments.