Our approach to the regulation of cryptocurrency needs clarity

It is certainly what many others think about as well. Prosecutors say conservative estimates of losses from this fraud stand at $8 billion for FTX customers, $1.7 billion for FTX investors, and $1.3 billion for Alameda lenders. Once the richest and most influential man in crypto, Fried or ‘SBF’ was the creator of the hugely successful crypto trading exchange FTX and the Alameda Research trading firm. His crypto empire came crashing down in November 2022, an outcome of multiple acts of financial fraud and deceit, all spearheaded by him.

The collapse of FTX marked a hellish patch for crypto currencies that sank to multi-year lows. After peaking at $3 trillion in November 2021, the FTX debacle saw the value of the overall crypto market slump to a two-year low of $796 billion. It also prompted a much needed regulatory crackdown.

Here in India, the relationship between regulation and crypto has remained fuliginous at the best of times. The three key protagonists in the crypto tale—the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and the government—have at different times held diametrically opposite views on cryptocurrencies. Of the three, it is clearly the central bank that has always been the most strident in its criticism and distrust of the crypto ecosystem.

However, it is the government that appears to have wound itself and policy action in knots. A cryptocurrency bill has been in the works since 2021, but still hasn’t seen the light of day. What came in its place in 2022 was a tax whammy. Crypto currency trades in India attract a levy of 1% tax deducted at source (TDS) along with 30% capital gains tax, without any provision of offsetting crypto losses. 

The government categorized crypto assets as “Virtual Digital Assets,” while refusing to address the moot question of whether they were legal or not. “Whether it is legitimate or illegitimate is a different question. But I will tax [crypto gains] because it is a sovereign right to tax,” finance minister Nirmala Sitharaman said on the matter.

For an industry that has often resembled the dotcom bubble in its narrative, regulation in India has constantly shied away from addressing the who, what and how of crypto. Crypto believers swear that this is the answer to financial democratization and crypto sceptics say it’s just fraud spelt with a ‘c’.

When I started collating the numbers around crypto trading in 2021, data by research firm Crebaco showed that about 15 million Indians had invested in cryptocurrencies through Indian exchanges. New sign-ups were driving close to a 150% month-on-month surge in trading volumes. 

The government and policymakers were clearly nervous. Crypto was popular with the younger generation and there was a visible trail of incidents across India involving kidnapping, extortion, money laundering and drug deals where crypto coins were the weapon or ransom currency of choice. 

So, even as a clear policy eluded crypto, two decisions were taken. The first was a hefty tax, perhaps aimed at curbing trading enthusiasm; the second was a notification released in March 2023 that brought crypto currencies and other digital assets under India’s anti-money laundering law. The PMLA intent here was to check money laundering by essentially placing the onus of transparency and checks on Indian crypto exchange platforms.

However, things haven’t worked out as planned. By the end of 2023, a report by think-tank Esya Centre reveals that about 3-5 million Indian users shifted to offshore platforms, resulting in $3.8 billion worth of trading volume moving out of domestic exchanges. It’s a loss of users and of taxes. Clearly, neither the 30% tax nor the PMLA inclusion has been a deterrent for those trading crypto; only a nuisance. One that private network connections have helped circumvent. 

Even as the information technology ministry blocked access to overseas platforms like Binance, Kucoin and Bitfinex, India-based crypto platforms and entrepreneurs have quietly moved business to locations like Dubai, probably because neither Indian policies nor the stress of staying based in India seemed appealing anymore.

While India’s crypto industry continues to play a guessing game of ‘what next’ with regulation, what’s clear is that our lack of policy clarity has never helped. The US has learnt the hard way that it needs to do more than just battle a stream of crypto-related litigation. The UK, EU, Singapore, Japan and Australia have moved forward with cogent regulatory frameworks for digital assets. 

For India, step one will be identifying who is taking charge of the situation. Should it be Sebi, which has purview over other financial markets? Should it be RBI, which is our bank regulator and monetary authority? Or should it be yet another body, a hybrid with financial and digital overview? The bigger question of regulation, however, isn’t who. It is why.