Centre for Internet and Society

What does the 2022 Finance Bill mean for crypto-assets in India?

Vipul Kharbanda, Aman Nair — 2022-02-03T06:31:54Z

The recent budget speech saw the Finance Minister propose a slew of measures that seek to clarify the taxation regime with regards to crypto-assets in India. The speech, and the proposed measures, have led to significant discussion and debate within the domestic crypto-ecosystem as questions continue to be raised about the ambiguous legality of crypto-assets in the absence of any dedicated crypto legislation. In the face of this uncertainty, this blog post looks to contextualise the proposals put forth by the Finance Minister in her speech and clarify what they mean for crypto-asset regulation and use in India.

Crypto-assets defined as a virtual digital asset and taxed at 30%

The 2022 Finance Bill, introduces the definition of a ‘virtual digital asset’ as an amendment to the 1961 Income Tax Act. The government defines a virtual digital asset as:

Any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
A non-fungible token or any other token of similar nature, by whatever name called;
Any other digital asset, as the Central Government may, by notification in the Official Gazette specify

Furthermore, the bill also introduces section 115BBH to the Income Tax Act, according to which income or profits generated from the transfer of ‘virtual digital assets’ would be taxed at the rate of 30%. The Finance Minister further clarified that any expenses incurred in carrying out such trades cannot be set-off or deducted from the profits generated, except the amount spent on buying the crypto-asset in the first place. Further in case of losses incurred from crypto-asset trading, such losses cannot be carried over to subsequent financial years.

While this clarification of the provisions relating to crypto-assets under the Income Tax Act, 1961 drew much attention for their potential impact, it is important to note that this measure is far from a departure from the government’s pre-existing stance. In responses to parliamentary questions on 30th November 2021 and 23rd March 2021, the Minister of Finance has repeatedly stressed the liability to pay taxes on any profits arising out of crypto trading under Indian tax law.

The budget speech merely clarified the provisions under which profits from crypto trading shall be taxed. Prior to this, there had been a fair amount of debate as to whether profits from crypto trading would be included as part of the regular income, income from other sources, or if they would be taxed as capital gains. This distinction and categorisation was critical as it determined the rate of tax applicable to crypto profits. However with the proposed section 115BBH, the government has made the taxation regime clearer on how these profits are to be taxed.

Introduction of TDS onto crypto-asset transactions and transfers

Another provision that this budget has proposed is the introduction of a 1% TDS (Tax Deducted at Source) on any transfer of a crypto-asset, provided that other conditions in relation to aggregate sales specified in the proposed section 194-S are satisfied. It must be noted that this TDS shall be payable not only on cash transfers, but even on trades where one cryptocurrency has been traded for another cryptocurrency. Thus trades where Bitcoin is bought using Tether would also be liable to such TDS deduction. Interestingly, the way the provision is currently drafted, if any person accepts payment for any goods or services in cryptocurrency, then such a person would be liable to pay TDS at 1%. This is because the Income Tax Act treats the cryptocurrency as the asset being bought or sold and treats the good or service being provided by the “seller” as the consideration. Thus instead of it being looked at as a transaction where one person is paying for something by using cryptocurrency, it is looked at as a transaction where the other person is buying the cryptocurrency and paying for it in kind (through the goods or services of the “seller”).

Questions of enforcement still remain

While these measures do bring a certain level of clarity and stability in the taxation regime with regard to crypto-assets, one still needs to grapple with the issue of their implementation. News reports suggest that about 15-20 percent of the investors in crypto assets are in the 18-20 year age group. A number of such investors do not file tax returns since they are mainly students investing their extra savings or “pocket money” to make a quick profit. Ensuring that this demographic actually follows the letter of the law may be a challenge for the revenue authorities and it would be interesting to see how they overcome it.

For more details visit https://cis-india.org/internet-governance/blog/what-does-the-2022-finance-bill-mean-for-crypto-assets-in-india

Report on Regulation of Private Crypto-assets in India

Aman Nair, Vipul Kharbanda, Aryan Gupta — 2022-01-27T09:16:08Z

CIS is excited to release its flagship report on regulating private crypto-assets in India.

Link to the report: CIS report on regulation of private crypto-assets in India

Link to Annex 1: Excerpts from the public consultation comments received from Ripple

EXECUTIVE SUMMARY

As of May 2021, the crypto-asset market in India stood at USD 6.6 billion. With no signs of slowing down, crypto-assets have become an undeniable part of both Indian and global financial markets. In the face of this rapid growth, policymakers are faced with the critical task of developing a regulatory framework to govern private crypto-assets.

This report is an introductory resource for those who are looking to engage with the development of such a framework. It first provides an overview of the technical underpinnings of crypto-assets, their history, and their proposed use cases. It then examines how they fit within India’s current legislative and regulatory framework before the introduction of a dedicated crypto-asset law and how the government and its institutions have viewed crypto-assets so far. We present arguments for and against the adoption of private crypto-assets and compare the experiences of 11 other countries and jurisdictions. Finally, we offer specific and actionable recommendations to help policymakers develop a cohesive regulatory framework.

What are crypto-assets?

At their core, cryptocurrencies (CCs) or virtual currencies (VCs) are virtual monetary systems consisting of intangible ‘coins’ that use blockchain technology and serve a multitude of functions. While the word ‘cryptocurrency’ is often used as an umbrella term to describe various assets within the crypto-market, we note that these assets do not all share the same characteristics and often serve different functions. Therefore, for the purposes of this report, we use the term ‘crypto-assets’ rather than ‘cryptocurrencies’ when discussing the broad range of technologies within the crypto-marketplace.

Crypto-assets utilize a distributed ledger technology (DLT) known as blockchain technology. A blockchain is a complete ledger of all recorded transactions, which is created by combining individual blocks, each of which stores some information and is secured by a hash. Blockchain, by the very nature of its architecture, can be used to ensure decentralisation, authenticity, persistence, anonymity, and auditability.

History and proposed uses of crypto-assets

While other forms of crypto-assets have been proposed in the past, the modern conception of one can be traced to a research paper published under the pseudonym, Satoshi Nakamoto, which first proposed the idea of bitcoin. Bitcoin, as it was presented, seemingly solved the ‘double spending’ problem by utilising a form of DLT known as blockchain. Bitcoin, which was first operationalised on 3 January 2009, has since become the dominant crypto-asset globally – trading at over USD 57,000 per bitcoin.

Following the popularity of bitcoin, several alternatives (known as alt coins) were launched, the most popular of which is ethereum. According to CoinMarketCap, as of April 2021, there are over 9,500 traded cryptocurrencies in existence, with a total market capitalisation of over USD 2 trillion. The rise of bitcoin and other crypto-assets also led to the emergence of crypto-exchanges such as Binance. These exchanges act as platforms for users to buy, sell, and trade crypto-assets.

Many potential use cases for crypto-assets have been identified, including:

A method of payment
A tradeable asset
Initial coin offerings
Crypto-asset funds and derivatives
Crypto-asset-related services

Legal frameworks and private crypto-assets in India

While crypto-assets are also referred to as virtual currencies and cryptocurrencies, they do not currently satisfy the legal requirements to be considered as currency under Indian law. Although they have not yet been classified as a financial instrument, it is possible, through executive action, to include them within the definition of any of the following instruments: currency, foreign currency, derivative, collective investment scheme, or payment system. Such a move would give the government a legal basis to regulate the hitherto unregulated crypto-asset market, thereby bringing about much-needed stability and minimising the risk of fraudulent practices.

Understanding the case for private crypto-assets

This report examines both the benefits and limitations of crypto-assets across a number of their use cases.

Benefits of crypto-assets as a currency and asset:

Decentralised and verifiable transactions
Reduced transaction costs
Confidentiality
Security
Easier cross-border transactions
A potential tool for financial inclusion

As a tool for verifying asset ownership

Limitations of crypto-assets as a currency and asset:

High environmental costs
Replaces traditional transaction costs with new costs
A few actors dominate mining
Cannot replace traditional money
Introduces challenges in implementing monetary policies
Lack of network externalities
The limited actual impact on financial inclusion
Use for illegal activities
Prone to schemes and scams

International Perspectives

In order to draw inferences and lessons from a multitude of perspectives, we examined the regulatory frameworks governing private crypto-assets in the following jurisdictions:

European Union
El Salvador
United States
United Kingdom
Japan
Venezuela
South Africa
Singapore
Indonesia
Switzerland
China

Recommendations

Keeping in mind the benefits and limitations, as well as the experiences of countries around the world, we recommend the following measures to develop an appropriate regulatory framework in India. We have divided our recommendations into 2 types: immediate or short term measures and longer term measures.

Immediate/ Short Term Measures

Steering clear of bans private crypto-assets

Earlier, regulatory bodies made calls to ban private crypto-assets, but this resulted in crypto-assets being assimilated into the unregulated black market, thereby stifling potential innovation. To that end we recommend avoiding a ban, and adopting a regulatory approach instead.

Recommend that regulatory bodies use their ad-hoc power to exercise interim oversight

During the interim period, prior to the adoption of a dedicated crypto-asset legislation, crypto-assets could be included under one of the existing financial instrument categories. The regulations governing them would apply to both cryptocurrency exchanges as well as vendors who accept payments in cryptocurrencies.

Long Term Measures

Specific Regulatory Framework

There needs to be an independent regulatory framework specific to crypto-assets since the unique features of crypto-assets make them unsuitable to be regulated through the existing regulatory frameworks.

Identify clear definitions

Policymakers should adopt a definition of crypto-assets that includes entities that have emerged within the crypto space but which cannot be classified as ‘currencies’. They must also categorise and define these various entities as well as crypto-asset service providers.

Limit the scope of regulations to crypto-assets rather than their underlying technologies

Any proposed regulation must differentiate between the assets themselves and the technology underlying them. This would ensure that crypto-assets are not defined by the technology they currently use (i.e., DLT and blockchain) but by the purpose they serve.

Introduce a licensing and registration system

A licensing system, similar to those adopted in other jurisdictions such as the EU or New York, can be adopted to ensure that the state is able to effectively monitor crypto-related activities.

Make provisions for handling environmental concerns

A dedicated taxation programme and strict limitations on mining can minimise the environmental costs associated with crypto-assets.

Consumer protection measures

Any potential licensing system must include mandatory obligations for crypto-asset service providers that ensure that consumer rights are protected.

Taking measures to limit the impact of crypto-asset volatility on the wider financial market

Governments must take measures to ensure that the volatility of crypto-markets does not have a significant knock-on effect on the wider financial market. Such steps can include limiting financial institution holdings and dealings in crypto-assets.

Extending Anti Money Laundering/ Counter Financing of Terrorism norms and exchange control regulations

Given the anonymous nature of crypto-assets and their potential for use in illegal activities, we recommend ensuring that crypto-specific anti-money laundering, prohibition of terror financing and foreign exchange management rules are introduced.

Create an oversight body

Subject to the availability of resources, the government might consider establishing a dedicated body to oversee and research changes in the crypto-marketplace and make appropriate suggestions to the concerned regulatory authorities.

Taxation

The existing uncertainty with regard to the correct tax provisions to be applied for various transactions when dealing with crypto-assets needs to be clarified with specific amendments to the tax provisions.

Stablecoin Specific Regulation

Given the specific position occupied by stablecoins, and the unique role that they perform in the crypto-ecosystem, any legislation that seeks to regulate private crypto-assets must focus heavily on them. To that end, policymakers should pay special attention to identifying the various entities associated with stablecoins, applying greater regulatory scrutiny onto those entities and taking steps to limit the risk that stablecoins pose to the wider financial system.

Note

A previous version of this post contained a link to a public consultation version of the crypto report. This version has since been taken down and the current version of the document is the final version.

For more details visit https://cis-india.org/internet-governance/blog/report-on-regulating-private-crypto-assets-in-india-public-consultation

RBI Ban on Cryptocurrencies not backed by any data or statistics

vipul — 2020-03-05T18:35:48Z

In March 2020, the Supreme Court of India quashed the RBI order passed in 2018 that banned financial services firms from trading in virtual currency or cryptocurrency. Keeping this policy window in mind, the Centre for Internet & Society will be releasing a series of blog posts and policy briefs on cryptocurrency regulation in India

On April 6, 2018 the RBI issued a circular preventing all Commercial and Co-operative Banks, Payments Banks, Small Finance Banks, NBFCs, and Payment System Providers not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies. The RBI had issued a Press Release cautioning the public against dealing in virtual currencies including Bitcoin in 2013. However, the growing popularity of cryptocurrencies and its adoption by large numbers of Indian users, may have been the reason which forced the RBI to issue another Press Release in February 2017 reiterating its earlier concerns regarding cryptocurrencies raised in its earlier circular of 2013. In December 2017 both the RBI as well as the Ministry of Finance issued Press Releases cautioning the general public about the dangers and risks associated with cryptocurrencies, finally culminating in the circular dated April 6, 2018 banning financial institutions from dealing with cryptocurrency traders. As a result of this circular the operations of cryptocurrency exchanges took a severe hit and the number of transactions on these exchanges reduced substantially. The cryptocurrency market in India all but disappeared with only a few extremely determined enthusiasts still dealing in cryptocurrencies, at the risk of potentially depriving themselves of banking services altogether.

The RBI circular was challenged in the Supreme Court by the Internet and Mobile Association of India; final arguments in the case were concluded only in the last week of January, 2020 with the judgment of the Supreme Court being awaited. Generally speaking, whenever such policy decisions of the executive branch are challenged in the courts, a well accepted defense for the executive authorities, specifically in highly complicated fields such as finance, etc. is that the decision was taken by an expert body using its expertise in the field. The basic rationale underlying this argument is that the authority has relied on verifiable data and used its expertise to analyse the same in order to arrive at its decision.

However, it appears from the response by the RBI to an RTI query by Centre for Internet and Society, that requested the RBI for a copy of all reports, papers, opinions and advice that was relied upon for issuing the April 6, 2018 circular, that the RBI has not relied upon any such data to come to a conclusion that banking services should be denied to all those entities dealing in cryptocurrencies. It appears from the response to the RTI query that it was the RBI’s own previous circulars and press releases which formed the basis for the April 6, 2018 circular. This response completely undermines the argument that the decision by the RBI was taken after an analysis of all the facts and statistics concerned with cryptocurrency trading.

Not only does the RTI response weaken the commonly accepted defense of an expert body making a well-reasoned decision, but it also strengthens another legal ground for challenging the decision of the RBI, viz. arbitrariness. One of the grounds on which executive decisions can be challenged is that the decision was made without taking into account relevant material and without the application of mind. The admission by the RBI in its RTI response that there is no material relied upon by the RBI, except its own previous Press Releases, only strengthens the argument that the decision was made in an arbitrary manner.

Such an admission by the RBI regarding the process followed before issuing the April 6, 2018 circular reduces the credibility of the decision itself. However it remains to be seen whether the Supreme Court of India agrees with the arguments of the petitioners challenging the April 6, 2018 circular, even though the petitioners may not have been able to produce this RTI response from the RBI to further bolster their case.

For more details visit https://cis-india.org/internet-governance/blog/rbi-ban-on-cryptocurrencies-not-backed-by-any-data-or-statistics

Launching CIS’s Flagship Report on Private Crypto-Assets

Admin — 2021-12-03T15:16:27Z

The Centre for Internet & Society is launching its flagship report on regulating private crypto-assets in India, as part of its newly formed Financial Technology (or Fintech) research agenda. This event will serve as a venue to bring together the various stakeholders involved in the crypto-asset space to discuss the state of crypto-asset regulation in India from a multitude of perspectives.

About the private crypto-assets report

The first output under this agenda is our report on regulating private cryptocurrencies in India. This report aims to act as an introductory resource for policymakers who are looking to implement a regulatory framework for private crypto-assets. The report covers the technical elements of crypto-assets, their history, proposed use cases as well as its benefits and limitations. It also examines how crypto-assets fit within India’s current regulatory and legislative frameworks and makes clear recommendations for the same.

About the Event

The launch event will feature an initial presentation by researchers at CIS on the various findings and recommendations of its flagship report. This will be followed by a moderated discussion with 5 panelists who represent the space in policy, academia and industry. The discussion will be centered around the current status of crypto-assets in India, the government’s new proposed regulations and what the future holds for the Indian crypto market.

The confirmed panelists are as follows:

Tanvi Ratna - Founder, Policy 4.0 and expert on blockchain and cryptocurrencies
Shehnaz Ahmed - Senior Resident Fellow and Fintech Lead at Vidhi Centre for Legal Policy
Nithya R. - Chief Executive Officer, Unos.Finace
Prashanth Irudayaraj - Head of R&D, Zebpay
Vipul Kharbanda - Non resident Fellow specialising in Fintech at CIS
Aman Nair - Policy Offer, CIS (Moderator)

Registration link: https://us06web.zoom.us/webinar/register/WN_TdY-EPLoRvGY2rfsq4CENw

Agenda

17.30 - 17.35

Welcome Note

17.35 - 18.35

The status of private crypto-assets in India

Presentation on CIS’ flagship Report on regulating private crypto-assets in India
Moderated discussion with panelists across industry, government, journalism and academia providing their insight as to the current and future state of private crypto-assets, and their regulation, in India.

18.35 - 19.00

Audience questions and discussion

For more details visit https://cis-india.org/internet-governance/events/launching-cis-flagship-report-on-private-crypto-assets

Launching CIS’s Flagship Report on Private Crypto-Assets

Aman Nair — 2021-12-13T09:11:18Z

This event will serve as a venue to bring together the various stakeholders involved in the crypto-asset space to discuss the state of crypto-asset regulation in India from a multitude of perspectives.

About the private crypto-assets report

About the Event

The confirmed panelists are as follows:

Tanvi Ratna - Founder, Policy 4.0 and expert on blockchain and cryptocurrencies
Shehnaz Ahmed - Senior Resident Fellow and Fintech Lead at Vidhi Centre for Legal Policy
Nithya R. - Chief Executive Officer, Unos.Finace
Prashanth Irudayaraj - Head of R&D, Zebpay
Vipul Kharbanda - Non resident Fellow specialising in Fintech at CIS
Aman Nair - Policy Offer, CIS (Moderator)

Registration link: https://us06web.zoom.us/webinar/register/WN_TdY-EPLoRvGY2rfsq4CENw

Agenda

17.30 - 17.35	Welcome Note
17.35 - 18.35	The status of private crypto assets in India Presentation on CIS’ flagship Report on regulating private crypto-assets in India Moderated discussion with panelists across industry, government, journalism and academia providing their insight as to the current and future state of private crypto-assets, and their regulation, in India.
18.35 - 19.00	Audience questions and discussion

For more details visit https://cis-india.org/internet-governance/blog/launching-flagship-cis-report-on-private-crypto-assets

Cryptocurrency Regulation in India – A brief history

vipul — 2020-03-05T18:36:09Z

The story of cryptocurrencies started in 2008 when a paper titled “Bitcoin: A Peer to Peer Electronic Cash System” was published by a single or group of pseudonymous developer(s) by the name of Satoshi Nakamoto. The actual network took some time to start with the first transactions taking place only in January 2009. The first actual sale of an item using Bitcoin took place a year later with a user swapping 10,000 Bitcoin for two pizzas in 2010, which attached a cash value to the cryptocurrency for the first time. By 2011 other cryptocurrencies began to emerge, with Litecoin, Namecoin and Swiftcoin all making their debut. Meanwhile, Bitcoin the cryptocurrency that started it all started getting criticised after claims emerged that it was being used on the so-called “dark web”, particularly on sites such as Silk Road as a means of payment for illegal transactions. Over the next five years cryptocurrencies steadily gained traction with increased number of transactions and the price of Bitcoin, the most popular cryptocurrency shot up from around 5 Dollars in the beginning of 2012 to almost 1000 Dollars at the end of 2017.

Riding on the back of this wave of popularity, a number of cryptocurrency exchanges started operating in India between 2012 and 2017 providing much needed depth and volume to the Indian cryptocurrency market. These included popular exchanges such as Zebpay, Coinsecure, Unocoin, Koinex, Pocket Bits and Bitxoxo. With the price of cryptocurrencies shooting up and because of its increased popularity and adoption by users outside of its traditional cult following, regulators worldwide began to take notice of this new technology; in India the RBI issued a Press Release cautioning the public against dealing in virtual currencies including Bitcoin way back in 2013. However, the transaction volumes and adoption of cryptocurrencies in India really picked up in earnest only after the demonetisation of high value currency notes in November of 2016, with the government’s emphasis on digital payments leading to alternatives to traditional online banking such as cryptocurrencies forcing their way into the public consciousness. Indian cryptocurrency exchanges started acquiring users at a much higher pace which drove up volume for cryptocurrency transactions on all Indian exchanges. The growing popularity of cryptocurrencies and its adoption by large numbers of Indian users forced the RBI to issue another Press Release in February 2017 reiterating its concerns regarding cryptocurrencies raised in its earlier Press Release of 2013.

In October and November, 2017 two Public Interest Petitions were filed in the Supreme Court of India, one by Siddharth Dalmia and another by Dwaipayan Bhowmick, the former asking the Supreme Court to restrict the sale and purchase of cryptocurrencies in India, and the latter asking for cryptocurrencies in India to be regulated. Both the petitions are currently pending in the Supreme Court.

In November, 2017 the Government of India constituted a high level Inter-ministerial Committee under the chairmanship of Shri Subhash Chandra Garg, Secretary, Department of Economic Affairs, Ministry of Finance and comprising of Shri Ajay Prakash Sawhney (Secretary, Ministry of Electronics and Information Technology), Shri Ajay Tyagi (Chairman, Securities and Exchange Board of India) and Shri B.P. Kanungo (Deputy Governor, Reserve Bank of India). The mandate of the Committee was to study various issues pertaining to Virtual Currencies and to propose specific actions that may be taken in relation thereto. This Committee submitted its report in July of 2019 recommending a ban on private cryptocurrencies in India.

In December 2017 both the RBI as well as the Ministry of Finance issued Press releases cautioning the general public about the dangers and risks associated with cryptocurrencies, with the Ministry of Finance Press Release saying that cryptocurrencies are like ponzi schemes and also declaring that they are not currencies or coins. It should be mentioned here that till the end of March 2018, the RBI and the Finance Ministry had issued various Press Releases on cryptocurrencies cautioning people against their risks, however none of them ever took any legal action or gave any enforceable directions against cryptocurrencies. All of this changed with the RBI circular dated April 6, 2018 whereby the RBI prevented Commercial and Co-operative Banks, Payments Banks, Small Finance Banks, NBFCs, and Payment System Providers not only from dealing in virtual currencies themselves but also directing them to stop providing services to all entities which deal with virtual currencies.

The effect of the circular was that cryptocurrency exchanges, which relied on normal banking channels for sending and receiving money to and from their users, could not access any banking services within India. This essentially crippled their business operations since converting cash to cryptocurrencies and vice versa was an essential part of their operations. Even pure cryptocurrency exchanges which did not deal in fiat currency, were unable to carry out their regular operations such as paying for office space, staff salaries, server space, vendor payments, etc. without access to banking services.

As a the operations of cryptocurrency exchanges took a severe hit and the number of transactions on these exchanges reduced substantially. People who had bought cryptocurrencies on these exchanges as an investment were forced to sell their crypto assets and cash out before they lost access to banking facilities. The cryptocurrency exchanges themselves found it hard to sustain operations in the face of the dual hit of reduced transaction volumes and loss of access banking services. Faced with such an existential threat, a number of exchanges who were members of the Internet and Mobile Association of India (IMAI), filed a writ petition in the Supreme Court on May 15, 2018 titled Internet and Mobile Association of India v. Reserve Bank of India, the final arguments in which were heard by the Supreme Court of India in January, 2020 and the judgment is awaited. If the Supreme Court agrees with the arguments of the petitioners, then cryptocurrency exchanges would be able to restart operations in India; as a result the cryptocurrency ecosystem in India may be revived and cryptocurrencies may become a viable investment alternative again.

For more details visit https://cis-india.org/internet-governance/blog/cryptocurrency-regulation-in-india-2013-a-brief-history

CIS Issue Brief on regulating Crypto-asset advertising in India

Aman Nair and Vipul Kharbanda — 2022-05-25T07:46:02Z

Over the past decade, crypto-assets have established themselves within the digital global zeitgeist. Crypto-asset (alternatively referred to as cryptocurrency) trading and investments continue to skyrocket, with centralised crypto exchanges seeing upwards of USD 14 trillion (or around INR 1086 trillion) in trading volume.

One of the key elements behind this exponential growth and embedding of crypto-assets into the global cultural consciousness has been the marketing and advertising efforts of crypto-asset providers and crypto-asset-related service providers.In India alone, crypto-exchange advertisements have permeated into all forms of media and seem to be increasing as the market continues to mature. At the same time, however, financial regulators such as the RBI have consistently pointed out concerns associated with crypto-assets, even going so far as to warn consumers and investors of the dangers that may arise from investing in crypto-assets through a multitude of circulars.

In light of this, we analyse the regulations governing crypto-assets in India by examining the potential and actual limitations posed by them. We then compare them with the regulations governing the advertising of another financial instrument, mutual funds. Finally, we perform a comparative analysis of crypto-asset advertising regulations in four jurisdictions - The EU, Singapore, Spain and the United Kingdom- and identify clear and actionable recommendations that policymakers can implement to ensure the safety and fairness of crypto-asset advertising in India.

The full issue brief can be accessed Here

For more details visit https://cis-india.org/internet-governance/blog/cis-issue-brief-on-regulating-crypto-asset-advertising-in-india

CIS Comments on the National Strategy on Blockchain

Vipul Kharbanda & Aman Nair — 2021-03-22T05:34:41Z

This submission is a response by the researchers at CIS to the report “National Strategy on Blockchain” prepared by Ministry of Electronics and Information Technology (MEITY) under the Government of India.

We have put forward the following comments based on our analysis of the report.

General Comments on the National Strategy

There are currently a number of reports and policies on blockchain use across departments, ministries and even states. The absence of a harmonised blockchain policy across all departments and institutions of government must be fixed.
There are inherent dangers with viewing blockchain as a silver bullet solution.
Informational concerns with blockchain are existent and policies must be designed to reflect these concerns and minimise their occurrences.

Section Specific Comments

Section 6.1 - There is a need for greater decentralisation and a shift away from a solely government operated blockchain
Section 6.2:

The legality of blockchain also faces the hurdle of smart contracts
The RBI decision to halt the use of cryptocurrencies was struck down by the Supreme Court
The right to be forgotten exists as an extension of the right to privacy as well

Section 7 - There is a need for greater detail and granularity in the report’s analysis and in the suggestions and recommendations that it makes.

The full submission to MEITY can be found at: https://cis-india.org/internet-governance/national-strategy-on-blockchain

For more details visit https://cis-india.org/internet-governance/blog/cis-comments-on-the-national-strategy-on-blockchain

Blockchain: A primer for India

Anusha Madhusudhan — 2020-03-30T13:32:58Z

This report is presently being updated.

For more details visit https://cis-india.org/internet-governance/blog/blockchain-a-primer-for-india

At the Heart of Crypto Investing, There is Tether. But Will its Promise Pan Out?

aman — 2021-07-01T14:46:46Z

The $18.5 million fine levied by the New York attorney general’s office earlier this year to settle a legal dispute, raises more questions than answers.

The article was published in the Wire on June 30, 2021.

Cryptocurrencies have become the centerpiece of the global digital zeitgeist in 2021. Anyone remotely familiar with them would probably be able to name a few of the famous ones like Bitcoin and Ethereum.

However, there exists a lesser known cryptocurrency at the heart of this $ 3 trillion market, Tether. Issued by the company Tether.ltd, Tether forms the foundation for modern day crypto trading and could potentially be one of the biggest schemes in financial history.

Tether is a special type of cryptocurrency known as a stablecoin. Unlike coins such as Bitcoin and Ethereum, Tether’s monetary value is not a function of the forces of the crypto market but is rather pegged to the US Dollar. What this means is that 1 Tether will always be worth exactly 1 USD. This fixed value has allowed it to occupy a unique position within the crypto ecosphere, with it becoming the de facto standard of liquidity within these markets by acting as a widely accepted substitute to the US dollar.

At present, buying cryptocurrency using traditional fiat money (like dollars or rupees) comes with certain challenges. Purchasing with traditional currencies requires the use of banking services that come with a host of fees and time delays. At the same time, purchasing one type of crypto coin like Bitcoin with another coin like Ethereum can prove difficult due to the constantly shifting values of both coins. This is where Tether comes in. Acting as a bridge between the traditional financial world and the crypto market, it has become a sort of digital dollar — one that makes cryptocurrency trading significantly easier.

The problem with tether

On the surface, Tether seems like a perfectly reasonable innovation that looks to fill in the gaps that exist within the market. Dig a little deeper than the surface and the discrepancies start to appear.

The premise of Tether’s appeal comes from its value being pegged to the US dollar. The company initially claimed to have achieved this by ensuring that their currency was “fully backed” by cash reserves.

The process looked something like this: You gave the company 1 US dollar and they gave you 1 Tether that you could use to make other crypto purchases. If you returned your Tether, you would get your dollar back and the Tether you returned would be ‘burned’ (removed from circulation). This meant that for every Tether that existed the company would have 1 corresponding dollar in reserve in the bank, ensuring that the currency was backed.

An illustrated image shows US dollars, cryptocurrency and NFT written on a phone. Photo: Marco Verch/Flickr CC BY 2.0

However, there was an enormous flaw in this system. Since Tether.ltd was the sole creator of the coin, it could create as many of them as it wanted while falsely claiming that these new Tethers were also backed fully by cash reserves. And this is exactly what is alleged to have happened in a case brought forward against Tether.ltd by the New York Attorney General’s office. The filings made by the attorney general noted that in their investigation they found that not only did the company have inadequate reserves to back the number of Tethers in circulation, but that there were significant periods of time wherein the company did not have any bank accounts or any access to banking at all — thereby exposing Tethers claims of being backed as being demonstrably false.

The scam was alleged to have worked as follows. First, the company would issue new coins that were not actually backed by any corresponding dollars. These new Tethers were then transferred to Bitfinex – a cryptocurrency exchange that was owned by Tether.ltd. These unbacked Tethers would then be used to buy bitcoin, with the momentum from this increased demand causing the price of bitcoin to rise. They would then exchange their newly appreciated bitcoins for actual US dollars — thereby essentially creating real money where none had previously existed. While there is no conclusive evidence for this being true, research has pointed to increased tether supply causing a boom in bitcoin prices in 2017.

The company has since altered its claim from being backed by cash reserves, to now being backed by a number of assets (which it refers to as its ‘reserves’) – of which cash only formed a small subset. It maintains that the cumulative value of their assets does equal the number of Tethers in circulation, though it is worth noting that the veracity of these claims has been consistently challenged.

How does this affect the rest of the crypto market?

Tether’s problems are unfortunately not limited to itself, but rather affect the entire crypto marketplace. If the New York Attorney General’s filings are true, then it would mean that a significant amount of the demand in the crypto market could potentially not be backed by any actual purchasing power and that the price of cryptocurrencies like bitcoin have been artificially inflated.

If Tether was ever found (either by a regulatory body or through leaks) to have been creating unbacked units of its currency then it would result in a significant amount of buying pressure disappearing from the crypto market. And since Tether isn’t just any other cryptocurrency but rather is a medium for exchange in the crypto world, its downfall would have severe knock on effects that could cause a serious crash in the entire crypto market.

Quantifying such knock-on effects would be extremely difficult, however as previously mentioned, research has clearly outlined a significant causal relationship between tether’s supply and increased bitcoin prices. This leads to the conclusion that the reverse would likely be true; that a rapid decrease in tethers would cause a significant decrease in the price of bitcoin and other cryptocurrencies.

Ultimately, no one knows for sure whether Tether is a scheme or not. However, mounting evidence from a number of independent sources have all pointed to discrepancies in the company’s functioning. What is clear is that, if the allegations are in fact true, then Tether poses a serious risk to the entire crypto marketplace and investors.

For more details visit https://cis-india.org/internet-governance/blog/the-wire-aman-nair-june-30-2021-cryptocurrency-tether-stablecoin-dollar

A Comparative Analysis of Cryptocurrency Reporting in Financial Statements

Aryan Gupta — 2021-06-15T05:25:39Z

The Ministry of Corporate Affairs (MCA) on March 24, 2021, came out with a notification inter alia mandating disclosures of cryptocurrency holdings by companies in their balance sheets. These changes have been effectuated by making requisite amendments to Schedule III of the Companies Act, 2013. The notification specified that companies are now required to report the profit or loss accrued due to trade or investment in any type of cryptocurrency or virtual currency, the amount of cryptocurrency that the company holds on the reporting date, and the deposits or advances from any person that have been made for the purposes of trading or investing in cryptocurrencies or virtual currencies.

The decision on new disclosure requirements comes amidst parliamentary discussions on cryptocurrency and speculations of another attempt at prohibition. Meanwhile, this step has been welcomed by the cryptocurrency industry in India as it signals towards a more positive approach being taken by the government with regards to corporate cryptocurrency transactions in India. Moreover, while it opens up new possibilities of scrutiny of such transactions, this measure will also be beneficial in identifying key policy gaps in cryptocurrency regulation in India when we look at corresponding requirements in foreign jurisdictions.

In this Issue Brief, the policy landscape in the United States of America (USA), United Kingdom (UK), and Japan is discussed and particular emphasis is placed upon definition, accounting practices, and taxation, with respect to cryptocurrencies. It is thus identified that such jurisdictions have taken concrete steps in this regard by providing clear guidance (such as through HMRC’s Cryptoassets Manual and ASBJ’s advisory notification on accounting for cryptocurrencies).

Then, the regulations in India are looked into comprehensively and specific policy recommendations are made, as it is ascertained that no clear steps have been taken in the aspects that have been mentioned above. Although the March MCA Notification is a positive step on corporate cryptocurrency transactions, the following steps are needed further: firstly, a clear and comprehensive definition of cryptocurrency and cryptoassets must be laid down, preferably through a central legislation; secondly, a separate category for cryptocurrencies under the Indian Accounting Standards (Ind AS) should be created; and thirdly, complete guidance on applicable taxes on cryptocurrency transactions, by individuals and corporates, must be provided.

It is thus concluded that while the government is willing to engage with various stakeholders, with positive intent, comprehensive and definitive steps are the need of the hour. This is essential to safeguard the large number of cryptocurrency investors in India, and to quell the uncertainty that is created by speculative measures such as banks declining services for cryptocurrency transactions.

The full issue brief can be read here

For more details visit https://cis-india.org/internet-governance/blog/a-comparative-analysis-of-cryptocurrency-reporting-in-financial-statements

Centre for Internet and Society

What does the 2022 Finance Bill mean for crypto-assets in India?

Crypto-assets defined as a virtual digital asset and taxed at 30%

Introduction of TDS onto crypto-asset transactions and transfers

Questions of enforcement still remain

Report on Regulation of Private Crypto-assets in India

EXECUTIVE SUMMARY

What are crypto-assets?

History and proposed uses of crypto-assets

Legal frameworks and private crypto-assets in India

Understanding the case for private crypto-assets

International Perspectives

Recommendations

Immediate/ Short Term Measures

Steering clear of bans private crypto-assets

Recommend that regulatory bodies use their ad-hoc power to exercise interim oversight

Long Term Measures

Specific Regulatory Framework

Identify clear definitions

Limit the scope of regulations to crypto-assets rather than their underlying technologies

Introduce a licensing and registration system

Make provisions for handling environmental concerns

Consumer protection measures

Taking measures to limit the impact of crypto-asset volatility on the wider financial market

Extending Anti Money Laundering/ Counter Financing of Terrorism norms and exchange control regulations

Create an oversight body

Taxation

Stablecoin Specific Regulation

Note

RBI Ban on Cryptocurrencies not backed by any data or statistics

Launching CIS’s Flagship Report on Private Crypto-Assets

About the private crypto-assets report

About the Event

Agenda

Launching CIS’s Flagship Report on Private Crypto-Assets

About the private crypto-assets report

About the Event

Agenda

Cryptocurrency Regulation in India – A brief history

CIS Issue Brief on regulating Crypto-asset advertising in India

CIS Comments on the National Strategy on Blockchain

General Comments on the National Strategy

Section Specific Comments

Blockchain: A primer for India

At the Heart of Crypto Investing, There is Tether. But Will its Promise Pan Out?

The problem with tether

How does this affect the rest of the crypto market?

A Comparative Analysis of Cryptocurrency Reporting in Financial Statements