crypto regulation

Developing countries may regulate Cryptos in 2021/22 in line with Developed countries

Crypto is a great tech innovation for system transaction efficiency and thus various developing countries are now keen to adopt the technology rather than accepting it as a legal tender (currency). Cryptos may help in a significant reduction of global remittances cost, which is now around 6.5% on an average, almost double of World Bank’s Sustainable Development Goal target of 3.5%; the aim is to reduce average global remittance costs to 2% for the benefit of migrant heavy middle-income countries/developing nations. Also, Cryptos/Blockchain/Ledger distributive technology can help financial inclusion in middle/low income/developing countries, which have a huge unbanked space.

In June’21, El Salvador became the world’s 1st country to adopt Bitcoin as a legal tender, enacting legislation that takes effect in September. This means that Bitcoin can be used to pay for goods and services throughout the country, and recipients are legally obliged to accept it. El Salvador also adopted the USD as legal tender in 2001 and now USD is the preferred currency used in all domestic transactions, despite the country has its currency (Colon). El Salvador’s president tweeted that Bitcoin will facilitate remittance transfers and considerably reduce transaction costs.

Apart from the benefit of lower remittance costs and greater financial inclusions, adoption of Cryptos in some form may also benefit certain countries (like Russia, Iran, North Korea, Venezuela, etc) to avoid U.S. controlled SWIFT global remittance system and perpetual risk of politically motivated U.S. economic sanctions; i.e. Cryptos or central bank digital currency (CBDC) may also replace U.S. monopoly over SWIFT payment system and de-dollarization of the world. In that scenario, USD may lose the monopoly status of global reserve currency and there may be increasing acceptance of the digital Yuan/Euro.

A landscape of Crypto regulation across the globe ensuring AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) and consumer protection:

U.S. Crypto Policy: Crypto trading/exchange legal but not comprehensively regulated at Federal levels, although sparsely regulated at various state levels

In the U.S., Crypto is classified in various forms by various regulatory authorities, but BTCUSD trades as a commodity derivative under CFTC supervision. The U.S. tax authority- Internal Revenue Service (IRS) does not consider Crypto as legal tender but defines it as ‘a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value’ and tax accordingly. The U.S. Financial Crimes Enforcement Network (FinCen) does not consider Cryptos to be legal tender but considers crypto exchanges to be money transmitters on the basis that Crypto tokens are ‘other value that substitutes for currency.’

The U.S. Securities and Exchange Commission (SEC) has indicated that it considers Cryptos to be securities and applies securities laws to digital wallets comprehensively in an approach that will affect both Crypto exchanges and investors. The U.S. Commodities Futures Trading Commission (CFTC) has adopted the ‘do not harm’ approach by recognizing Bitcoin and Ethereum as commodities and allowing other virtual and Cryptos as commodity derivatives to trade publicly on exchanges that it regulates or supervises. In the U.S., Crypto regulation varies across states. Crypto trading is legal. Crypto is not a legal tender but a voluntary tender. 

Crypto exchange is legal under registration with various state regulatory authorities. Crypto exchanges in the U.S. fall under the regulatory scope of the Bank Secrecy Act (BSA). In reality, this means that Crypto exchange service providers must obtain the requisite license from FinCen, has to ensure the required AML/CFT and other regulations. The U.S. keeps Crypto exchanges in the same regulatory category as traditional AML/CFT gatekeepers, financial institutions, and money transmitters:  accordingly, it applies the same regulations, including those set out in the 2021 amendments to the Bank Secrecy Act.

Looking ahead: the U.S. may go for a comprehensive Crypto regulation at Federal levels

The US Treasury has emphasized an urgent need for Federal and global Crypto regulations to combat global and domestic criminal activities. In 2018, Treasury Secretary Mnuchin announced a new FSOC working group to explore the increasingly crowded Crypto marketplace and in Dec’20, FinCen proposed a new data collection requirement for persons responsible for managing cryptocurrency exchanges, digital assets, DTLs, and crypto payments and on certain private digital wallets. If implemented, the regulation would also require exchanges to submit suspicious activity reports (SAR/CTR) for transactions (over the current threshold of $10K) and require non-registered financial institutions or MSB wallet owners to identify themselves when sending $3K or more in a single or series of linked transactions. 

The U.S. DOJ (Department of Justice) continues to coordinate with the SEC, CFTC, and other agencies over future Cryptocurrency regulations to ensure effective consumer protection and more streamlined regulatory oversight. Some states in the U.S. have regulated Cryptos while others are considering laws to regulate. New York has proposed a conditional licensing framework to make it easier for start-ups dealing in virtual currencies to operate. Wyoming has already passed a bill allowing the creation of a bank that is specially meant to allow the business to hold digital assets safely and legally. Oklahoma has introduced a bill authorizing the use, sale and exchange of Cryptos within government agencies. 

In 2020, there was no meaningful progress of Crypto regulation in the U.S. amid COVID disruption. But looking ahead, the U.S. will be at the forefront for an appropriate local and global Crypto regulation to ensure USD supremacy as World’s preferred reserve currency. The U.S. Treasury and Fed are trying for a global Crypto policy. 

Indian Crypto Policy: Crypto trading/exchange legal but not  regulated

At present Crypto is not classified under any assets (digital currency or commodities). Crypto trading is now legal but Crypto, not legal tender. Crypto exchange is now officially legal without any official regulator. In brief, Crypto trading/exchange in India is now virtually/effectively illegal, but some regulations are being considered. While Crypto exchanges are legal in India, due to the absence of any robust regulatory framework- a lingering licensing process makes it very difficult for certain Crypto services to operate.  

Crypto exchange regulations in India have grown increasingly strict. While technically legal, in 2018, India’s Central Bank RBI banned banks and any regulated financial institutions from ‘dealing with or settling virtual currencies. In Jan’18, RBI confirmed that it had not issued any licenses or authorizations to any entity or company to operate a scheme or deal and had issued warnings about dealing in virtual currencies and introduced a requirement for firms to unwind or exit their positions. It also confirmed that new prohibitive regulations were planned. The sweeping regulation prohibited the trade of Cryptos on domestic exchanges and gave existing exchanges until 1st week of July’18 to wind down; i.e. by mid-2018, Cryptos were effectively banned in India.

In 2018, the Indian finance ministry had also issued an official statement on Cryptos: ‘the government does not consider cryptocurrencies as legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or a part of the payment system, but the government will explore the use of Blockchain technology proactively for assuring in the digital economy.

Further in mid-2019, a government committee had recommended banning all private Cryptocurrencies transactions and even proposes a jail term of up to 10 years as well as heavy penalties for anyone dealing in digital currencies. However, the Indian Supreme Court (SC) in March’20 overturned RBI’s 2018 circular, permitting banks to handle Cryptocurrency transactions from Crypto traders and exchanges. India’s SC ruled the Crypto ban unconstitutional, reversing the prohibition and allowing Crypto exchanges to reopen. 

In the last few months, the Indian Crypto trading/investing was boosted by a recent RBI clarification that its 2018 circular preventing banks from dealing in virtual currencies is invalid and cannot be cited anymore by any banks to prevent Crypto-related payment procession as it was already set aside by the SC in 2020. 

Indian investors and traders, who are interested to trade/invest Crypto-assets like Bitcoin, use the service of various foreign or domestic Crypto platforms/brokerages. But Indian Crypto platforms charge an additional 18% tax (as GST) on various fees/brokerages/regulatory charges/margins (not trading volume) as per normal currency/stock/commodity trading regulation in India, while their foreign counterparts do not pay any such GST as they are out of Indian jurisdiction.

The Indian government may impose an 18% flat tax (GST) on trading volume by Indian citizens (liable to pay taxes in India) for all Crypto service providers (domestic as well as foreign). Presently, India-based Crypto service providers collect and pay 18% GST on trading charges only, not on overall volume.

After years of uncertainty over Crypto regulation or outright banning, it now seems that the Indian government may be moving towards some definitive steps to regulate Crypto/Bitcoin as an intangible asset (tech/digital assets/commodities) rather than a legal/illegal tender (currency).

As per reports, the Indian government is now also exploring whether overseas Crypto exchanges that have a customer base in India are required to pay GST when they provide certain data services as per Indian law. According to Indian tax laws, almost all transactions that involve Indians consuming goods and services invite a GST charge. And these charges could be 18% for Crypto exchanges. The Indian government could categories services provided by overseas Crypto exchanges that allow Indians to trade on their platforms as online information database access and retrieval (OIDAR) services. The OIDAR rules say any digital or data service provided to Indians or people based in India should be taxed.

Apart from the hurdle of 18% GST on margin/commission charged by local Crypto exchanges, many Indian investors/traders have already moved to overseas Crypto trading platforms. Also, many Indian Crypto exchanges/platforms are finding it difficult to operate Crypto exchanges under strict/tedious regulations and lack of secure viable, permanent payment solutions (in India) to ensure seamless transactions after banks and payment gateways started cutting ties with them despite the RBI clarification. 

India maybe now aiming to prevent huge money laundering, corruption, and various criminal activities including terrorism funding using Crypto platforms, and thus may impose GST/taxation regulation in some form, which will force KYC verification/documents of Crypto traders/investors and the actual beneficiary; i.e. regulation will ensure effective AML/CFT compliances.

India will never allow Cryptos (Bitcoin) as a legal or voluntary tender in the country, but may legalize Crypto trading/investments by some regulations and may also adopt Crypto techs like Ledger distribution technology for easing of voluminous data processing capacity.

Cryptos are not illegal in India per se. But India does not have a regulatory framework to govern Cryptos as of now as it does not fall into any recognized asset class like currency or commodity. The Indian government had constituted an Inter-Ministerial Committee (IMC) in Nov’17, to study virtual/digital/Cryptocurrencies. The Group’s report, along with a Draft Bill, pointed out the prospect of Crypto distributed-ledger technology and suggested various applications, especially in financial services, for its use in India, including banks and other financial firms.

The 2017 IMC report also flagged reservations about Crypto misuse and wanted to put a blanket ban in India. However, it now seems that cryptos may not face an outright ban in India. The Indian government may soon set up a panel to regulate them. Recently, the Indian government has taken some steps towards regulating Cryptos in India. The Indian Government has made it mandatory for companies to disclose crypto trading/investments during the financial year. 

The accounting of crypto assets is aimed at curbing money laundering via cryptos. The Indian Federal government has assured crypto stakeholders there won’t be a blanket ban on digital currencies and planning some Crypto policies. Indian Finance Minister Sitharaman recently said the government has an open mind regarding the adoption of new techs like Cryptos. While the Indian government has some reservations regarding Cryptos, it’s also working on its digital currency backed by Central Bank (CBDC). India does not want to be behind the curve of new techs and also aims to take benefit of game-changing tech like Blockchain/LDT.

Looking ahead: India may regulate Cryptos in 2021-22

The Indian government may soon table Digital Currency Bill, 2021 in the forthcoming Parliamentary sessions emphasizing Crypto techs and a framework for RBI-controlled CBDC. Indian Finance Minister Sitharaman promised a calibrated approach for the Cryptos. India may set up a fresh committee to study the possibility of Crypto regulation in the country and the setup of a Crypto regulator through SEBI (India’s financial market regulator) in some format in 2021. As India is a country of money laundering/huge corruption at all levels, the Modi admin may not encourage Crypto trading too much by too easy regulations. 



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