The Synthesis Paper seeks to address this very problem. It sets out a comprehensive policy and regulatory response to address the financial stability and macroeconomic risks triggered by the widespread use of crypto-assets. Regulators across jurisdictions will still need to frame their own rules but can rely on the broad policy recommendations of the IMF and FSB (as set out in the Synthesis Paper).

What does this mean for crypto-asset regulation in India?

This has two significant implications for crypto-asset regulation in India. First, it seems that regulators in India have moved away from a complete crypto-asset ban to a policy that supports regulation of the crypto ecosystem. Second, the Indian regulatory framework will broadly align with principles that find global acceptance.

But the question still remains: what will an Indian framework for crypto-asset regulation look like?

Regulation & Licensing of Intermediaries: The crypto ecosystem is decentralized but still relies on multiple intermediaries (exchanges, wallet platforms, and token issuers). Regulation of intermediaries with rules centered around KYC requirements, consumer protection, disclosures & and reporting requirements will likely be the focus.

AML/CFT Rules: Extension of anti-money laundering (AML) and counter-terrorist financing (CTF) standards to crypto-assets and intermediaries (which has been operationalized in India). The Government has already brought VDAs and VDA service providers within the scope of the Prevention of Money Laundering Act, 2002 (PMLA). Crypto exchanges must report suspicious transactions to the Finance Department.

Use-case-based approach: One of the unique characteristics of a crypto-asset is that it could potentially have multiple use cases, making it especially challenging to regulate. A crypto token could operate as an asset or commodity, a security, or a store of value. Any regulatory framework will need to address challenges arising from multiple use cases and require amendments to several legislations. Amendments to securities regulations, for instance, will most likely be needed to regulate token issuances and any crypto-asset that functions more like a “security”.

Governance Frameworks: Disclosure and transparency requirements for governance frameworks that underline the operation and functioning of crypto-assets that include a rights–obligations matrix for users (for example, a gaming token).

Shadow Currency Risks: Prohibition on any crypto asset being granted the status of legal tender, which has also been a recommendation made by IMF & FSB.

Payments: Amendments to payments regulations to supervise crypto-assets that operate as a store of value and enable peer-to-peer transfers (similar to a payments system).
Financial Inclusion Goals & Cross-Border Payments

Two key goals of a well-regulated and efficient crypto-asset ecosystem for India should be developing low-cost cross-border payment solutions and pushing the financial inclusion agenda. Crypto assets have the ability to be accessed “anywhere, anytime” without the need for physical infrastructure. Blockchain-based solutions rely on smart contracts which can be developed to solve specific needs such as the distribution of public benefits. For example, proof of an address located in a disaster hit pin code could automatically entitle persons to digital tokens that can then be used to access goods/services.

The potential use cases for crypto-assets are multiple. India is at a critical juncture in its adoption of crypto-assets, and a balanced regulatory framework will help the Indian market leverage the good while also addressing the market and financial risks created by crypto-assets.

This article was originally published in The Economic Times on 24 September 2023 Written by: Shilpa Mankar Ahluwalia, Partner. Click here for original article

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