Crypto regulation & Indian financial markets: A change towards compliance

The Indian financial market is undergoing a profound transformation, driven by the government’s careful consideration of cryptocurrency regulation. This evolving space not only captures the attention of enthusiasts but also raises fundamental questions about the future of digital finance in India.

Crypto has witnessed significant surge in popularity among Indian customers, with India emerging as the 4th biggest nation in adopting crypto, receiving $172 billion in crypto value from July 2021 to June 2022 according to the Chainalysis 2022 Geography of Cryptocurrency Report.

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The introduction of the Cryptocurrency Bill 2021 by the Indian government marked a significant turning point in the journey toward regulating the crypto market. This comprehensive bill addresses both private and financial law aspects, signalling the government’s commitment to establishing a structured framework for digital currencies. Currently, the bill is under consideration in the Lok Sabha, holding the promise of shaping the future of cryptocurrencies in India.

One key aspect of this transformation is the taxation and money laundering rules surrounding cryptocurrencies. India has amended its income tax laws to facilitate the taxation of cryptocurrencies, marking a notable shift in the country’s approach to digital assets. Additionally, the inclusion of crypto businesses under money laundering rules empowers regulatory bodies with the authority to oversee the industry effectively. These changes reflect the government’s intent to ensure transparency and accountability within the crypto space.

India’s efforts to regulate cryptocurrencies have garnered support on the global stage. Institutions like the International Monetary Fund and the United States at G20 meetings have expressed their endorsement. However, the ultimate decision on whether to regulate or ban cryptocurrencies remains uncertain. This uncertainty underscores the complexity of the regulatory landscape, where finding a balance between innovation and security is crucial.

Responsible regulation is key to safeguarding users’ interests while fostering innovation

Roshan Aslam, Co-Founder & CEO of GoSats

Roshan Aslam, Co-Founder & CEO of GoSats, a cryptocurrency-focused platform, emphasizes the significance of these developments, “The Indian government’s proactive stance toward cryptocurrency regulation is a positive sign for the industry. It reflects a growing recognition of digital assets’ role in the modern financial landscape. Moreover, responsible regulation is key to safeguarding users’ interests while fostering innovation.”

With these highlights, the Indian financial market is at a pivotal juncture, where cryptocurrency regulation will significantly influence the future of digital finance.

A More Inclusive & Secure Financial Ecosystem

As India and industry leaders recognize the transformative power of responsible regulation, the overarching goal is to create a more inclusive and secure financial ecosystem that enables individuals to harness the potential of cryptocurrencies for their financial well-being.

The recent acknowledgement of much needed regulatory framework for AI & Crypto will instill confidence among the Indian masses that have already adopted some forms of AI or Web3 in their lives while the industry has set its eye on upcoming G20 meetings for more clarity

Shivam Thakral, CEO of BuyUcoin

“The recent acknowledgement of much needed regulatory framework for AI & Crypto will instill confidence among the Indian masses that have already adopted some forms of AI or Web3 in their lives while the industry has set its eye on upcoming G20 meetings for more clarity,” says Shivam Thakral, CEO of BuyUcoin.

Global coordination of crypto regulations is imperative in today’s interconnected world, says Om Malviya, President at Tezos India, a blockchain adoption entity.

It’s time for nations to come together and shape the future of crypto in a way that’s both progressive and secure

Om Malviya, President at Tezos India

“The crypto space is evolving rapidly, and as it does, it becomes increasingly important for countries to collaborate and establish a uniform, crypto-friendly policy framework. By harmonizing regulations and promoting responsible crypto adoption, we can harness the full potential of blockchain technology, ensuring it benefits individuals, businesses, and economies worldwide. It’s time for nations to come together and shape the future of crypto in a way that’s both progressive and secure.”

Manhar Garegrat, Country Head for India and Global Partnership at Liminal, says a consensus among global leaders on the fact that crypto is a global digital asset followed by calls from leading economic officials for global coordination of crypto regulations, is a positive.

With a global regulatory framework in place, we can expect to better tackle challenges such as money laundering, terrorist financing, and market manipulation

Manhar Garegrat, Country Head for India and Global Partnership at Liminal

“The rapid growth of the digital asset industry has created new challenges for regulators, and it is important that the regulators work together with the industry to develop a comprehensive and consistent regulatory framework. With a global regulatory framework in place, we can expect to better tackle challenges such as money laundering, terrorist financing, and market manipulation. We have already seen glimpses of this positive impact with the Travel Rule framework created by the FATF and supported by exchanges, custodians and other virtual asset service providers (VASPs).”

Regulations are important for safeguarding the interests of investors, not only in the crypto industry but across all sectors, says Zakhil Suresh, CEO of BitSave.

I personally believe that positive regulatory measures hold the potential to be a catalyst for the next significant crypto rally. They can provide the assurance and stability needed for a broader spectrum of investors to participate in the crypto market confidently

Zakhil Suresh, CEO of BitSave

“There is a popular misconception that ‘unregulated’ implies a free pass to engage in fraudulent activities. So, it is important to clarify that this is not true. In reality, numerous crypto exchange founders have faced legal consequences, including jail sentences, for fraudulent actions. What regulation truly entails is the establishment of guidelines for conducting business and the presence of government oversight to ensure adherence to these guidelines. In regulated environments, misconduct carries heavy fines, which significantly reduces fraudulent occurrences,” he told The Tech Panda.

A pertinent example is the Indian stock market, where stringent regulations imposed by SEBI have substantially curbed fraudulent activities over the years. Had similar regulations been in place within the crypto sphere, some catastrophic events, like the collapse of FTX, might have been prevented.

“In the absence of guidelines, the risk of misusing customer funds is elevated. Hence, crypto industry regulation fosters investor confidence,” he adds.

However, governing crypto assets presents unique challenges. Crypto assets operate on a global scale, transcending traditional geopolitical boundaries. Unlike fintech platforms like PayPal and Apple Pay, where each country can issue specific guidelines aligned with its economic policies, crypto assets are decentralised. Consequently, a nation cannot dictate the operational parameters of the Bitcoin blockchain within its borders.

“This complexity underscores the importance of seeking a global consensus, as India has done within the G20, to establish a common regulatory framework. Such an approach ensures consistency and coherence across borders,” he explains further.

“I personally believe that positive regulatory measures hold the potential to be a catalyst for the next significant crypto rally. They can provide the assurance and stability needed for a broader spectrum of investors to participate in the crypto market confidently,” he says.

Compliance & Regulation is Good for Crypto Organizations

Crypto regulations help crypto organizations the most. For example, in September, Mudrex, a crypto investment platform headquartered in Bengaluru and San Francisco, achieved successful registration in India and regulatory recognition in the European Union (EU). The company is now a registered reporting entity with the Financial Intelligence Unit (FIU) in India and holds the status of a Virtual Asset Service Provider (VASP) accredited by the Bank of Lithuania within the EU. Mudrex has also recently obtained its OAM (Organismo Agenti e Mediatori) certification in Italy. This milestone underscores Mudrex’s commitment to regulatory compliance in places that it operates.

Similarly, in July, Jocata, a B2B FinTech and RegTech platform provider for BFSI industry tied up with CoinDCX, an Indian crypto company, to boost their Anti-Money Laundering (AML) compliance processes.

Recently, the SEC filed 13 charges against Binance entities and founder Changpeng Zhao as well as Coinbase for operating as an unregistered securities exchange, broker, and clearing agency.

Mahin Gupta, Founder of Liminal, says the lawsuits filed by the SEC against Binance and Coinbase indicate a significant shift in regulatory approach towards the digital asset industry.

While these measures may ultimately contribute to legitimizing the web3 industry in the long run, it is important to acknowledge that such strong actions could potentially stifle innovation. Therefore, web3 firms need to proactively prepare themselves for heightened regulatory scrutiny

Mahin Gupta, Founder of Liminal

“Previously, the SEC had faced criticism for its perceived slow response in regulating the industry, which allowed certain malicious actors to operate without proper oversight, as exemplified by the FTX incident. This marks the beginning of a series of actions aimed at establishing tighter control over the industry. While these measures may ultimately contribute to legitimizing the web3 industry in the long run, it is important to acknowledge that such strong actions could potentially stifle innovation. Therefore, web3 firms need to proactively prepare themselves for heightened regulatory scrutiny,” he says.

Web3 enterprises must prioritize compliance with all relevant laws and regulations. Additionally, they should establish robust internal controls to safeguard investor interests.

“Transparency regarding their operations is crucial, as is constructive engagement with regulators. By fostering collaboration between the digital asset industry and regulators, a balance can be struck between promoting innovation and ensuring investor protection. This collaborative approach will ultimately foster the long-term growth and success of the web3 industry,” he adds.

India’s Crypto Tax Calls for Compliance

In 2022, the Indian government implemented a tax on investments in virtual digital assets, whereby any income gained from the transfer of such assets is now subject to a 30% tax and 1% TDS. The complexity of the new tax laws has led to considerable confusion among Indian retail investors and traders in India. Owing to this, there is a critical need to establish appropriate compliance infrastructure and enhance investor knowledge on how to file taxes correctly.

With India’s optimistic outlook towards the crypto market, and the emergence of new taxation infrastructure, the country is poised to become a key player in the global crypto market.

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Indian businesses are making the efforts. In May, Indian crypto assets platform Giottus and TaxNodes, an ITR filing platform tied up to provide a safe and reliable solution to customers trading and investing in virtual digital assets (VDAs). With both brands sharing a common goal of investor education and compliance around crypto taxation in India, this partnership reinforces their commitment to empowering investors in the VDA space.

At the beginning of this month, Taxnodes also tied up with ZebPay, Indian crypto asset exchange, to simplify tax filing for virtual digital assets in India. TaxNodes will provide assistance to ZebPay’s user community to ensure precise tax calculations and compliance, to keep them updated with the most recent tax-related developments in the virtual digital asset industry.