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Following several banks pulling away from cryptocurrency exchanges, IndiaTech.Org, an umbrella body for India’s technology start-ups, has sent a 5-point policy proposal framework to the government and Reserve Bank of India. The full presentation has been prepared around bringing positive crypto regulations to India.

Recently several banks such as ICICI Bank, IndusInd Bank have asked payment gateway operators to stop their services for merchants trading in cryptocurrencies directly or indirectly. The sudden move surprised many as the Supreme Court last year in March set aside the RBI’s circular dated April 6, 2018, which banned cryptocurrency trading in India.

In the absence of any clarification from the RBI, the cryptocurrency exchanges as well as crypto users are left in the lurch and are looking up to the regulator to clear the stance on whether banks in India can service the crypto industry or not. There are currently over 10 million crypto users in India with an estimated value of Rs 1,000 crore.

The White Paper states that “The Reserve Bank of India (RBI) has reiterated the several risks associated with cryptocurrencies, including their lack of backing by a tangible asset to the Government multiple times. There exists a perceived risk of market manipulation which may have implications for consumer protection. Some of these risks may be unique to crypto, however, these may be true for other financial products too. India has done an exceptional job defining the right regulations for such issues in other sectors and can adopt a similar approach for crypto that can be an example for many other geographies to follow.”

To mitigate these risks, IndiaTech.org has proposed a 5-point framework to regulate crypto as follows:

I. Define crypto assets and also introduce a system for registering local homegrown crypto exchanges in India;
II. Introduce sufficient checks and balances through well-defined reporting mechanisms, accounting standards and mechanisms to counter suspicious activities and/or transactions, enable traceability and combat Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT);
III. Enable taxation (Direct and Indirect) to treat crypto assets just as other current assets (but not cash), permit disclosures and regulate import which would result in additional revenue generation;
IV. Allow innovative uses of crypto by businesses and create specific safeguards to protect retail investors from token issuance;
V. Encourage self-regulation for the industry to adhere to the defined code of conduct carved out under such a self-regulatory model which would be framed in alignment with the government’s primary objective of safeguarding consumers as well as financial stability.

India’s stance

The uncertainty about the future of cryptocurrencies, including Bitcoin, has grown manifold as the bill on cryptocurrencies is being finalised and will soon be sent to the Cabinet. RBI and SEBI do not have any legal framework to directly regulate cryptocurrencies. The existing laws are inadequate to deal with issues concerning them.

Finance Minister Nirmala Sitharaman recently said there won’t be a complete ban. She also said RBI will be taking a call on the regulation part. While FM’s statement is considered a positive sign by crypto exchanges, there are various media reports suggesting that RBI is seeking a complete ban on virtual currencies.

It is not the first time crypto investors are facing this situation. In 2018, RBI banned all banks from dealing with crypto exchanges which effectively led to the closure of exchanges. A three months notice was given last time to liquidate their investments. The RBI ban was later overturned by the Supreme Court in March 2020.