India Crypto Regulations 2023

India considers itself an innovation hub for a digital asset ecosystem. It promotes FinTech startups and has established a conducive environment for the digital adoption of financial services. While the Government has been accommodating and welcoming to the application of blockchain and Distributed Ledger Technology (DLT) for governance, it has exercised caution towards virtual assets like cryptocurrencies. In 2018, the Central Bank, the Reserve Bank of India (RBI) prohibited its financial services-regulated entities from facilitating the sale and purchase of cryptocurrencies. This made crypto exchanges obsolete within India for Rupee-based transactions. In 2020, the Supreme Court of India ruled that the prohibition was unconstitutional. The RBI expects regulated entities to undertake mandatory Customer Due Diligence (CDD), AML, KYC, and CFT activities under the Prevention of Money Laundering Act, 2002 (PMLA) and the Foreign Exchange Management Act (FEMA). The RBI remains cautious towards the involvement of banks and financial institutions in virtual asset transactions, directing the regulated entities’ willingness to accept crypto clients.

Crypto Asset regulation

India does not have an overarching regulatory framework specifically for virtual currencies. Cryptocurrencies cannot be used as legal tender or a medium of exchange. In 2021, the Government listed the ‘Cryptocurrency and Regulation of Official Digital Currency Bill’ to be introduced in the Parliament. The purpose was to create a framework for the creation of Central Bank Digital Currency and prohibit all private cryptocurrencies in India. Certain exceptions were allowed to promote the underlying technology of cryptocurrencies and use cases. The Bill has not been tabled. The Government has expressed a view that any step towards either regulating or banning virtual currencies must be in conjunction with international cooperation as the ripple effects of any legal direction toward virtual currencies will transcend international boundaries.

Licensing

There is no specific framework to register or license crypto platforms.

Financial crime

The RBI considers virtual currencies to carry a higher AML / CFT risk due to the inherent properties of being decentralized, anonymous and volatile. Regulated entities must continue to carry out customer due diligence processes in line with regulations governing standards for KYC, AML, CFT, and obligations of regulated entities under PMLA, in addition to ensuring compliance with relevant provisions under FEMA for overseas remittances. Virtual Asset Service Providers / Virtual Asset Exchange Providers (VASPs) are not regulated by RBI or the securities regulator, Securities, and Exchange Board of India (SEBI), and are perceived to carry a risk of cybersecurity crime. Since June 2022, the Computer Emergency Response Team (CERT) has been appointed as the nodal cybersecurity agency. The Government mandates that VASPs and entities like VASPs must maintain KYC data and records of financial transactions for at least a period of five years. The KYC obligations must be in accordance with RBI, SEBI, and Department of Telecom (DoT) standards to ensure cyber security in the area of payments and financial markets for citizens while protecting their data, fundamental rights, and economic freedom in view of the growth of virtual assets.

Marketing Guidelines

No specific regulations are in place for virtual assets. In April 2022, the Advertising Standards Council of India (ASCI), published guidelines for advertising and promotion of virtual digital assets and services (VDA Ad Guidelines). The guidelines are binding in the following contexts: 1) to members of ASCI for ads across any medium, and 2) to ads on cable television (for members or non-members). The guidelines prohibit the use of the words 'currency, securities, custodian, and depositories' in advertisements, as consumers often associate such terms with regulated products. It also sets disclaimer requirements for VDA advertisements.

Support for the Industry

There is no formal support in place for virtual currencies. A recent amendment to the Companies Act mandates all Indian companies to declare details about crypto or virtual currencies, as part of their annual financial statement reporting. These include: profit or loss on transactions involving VC, amount of VC held as of the reporting date, and deposits or advances from any person for the purpose of trading or investing in VC.

POV towards Stablecoins

The Government and the RBI carry the same level of apprehension for stablecoins, as for other cryptocurrencies. As many stablecoins are based on foreign currencies, the RBI remains concerned that some could become a threat to the sovereignty of India’s monetary policy framework.

Central Bank Digital Currency (CBDC)

In the Union Budget of FY23, the Government announced that the RBI will begin a phased CBDC rollout in 2022. The subsequent Concept Note on CBDC outlines the design choices and technology behind the project. According to the RBI, a digital rupee could enhance the digital adoption of financial services, target delivery of government projects, and improve cross-border payments. In November 2022, the RBI initiated a pilot for a wholesale CBDC, with the intention to test the infrastructural and banking capabilities. The pilot involves banks undertaking trading in Government securities via an account-based wholesale CBDC. In December 2022, the RBI also launched a retail CBDC pilot with a selected group of banks, merchants, and customers.

Sources:

https://www.pwc.com/gx/en/new-ventures/cryptocurrency-assets/pwc-global-crypto-regulation-report-2023.pdf