SEBI recommendations bring India’s crypto regulation to a Crossroad

India’s regulatory approach to cryptocurrencies is changing. The Securities and Exchange Board of India (SEBI) suggested that multiple regulators should oversee cryptocurrency trading in the country. Its recommendations lean toward a distributed regulatory oversight model.

The recommendation departs significantly from India’s traditionally restrictive stance towards digital assets. This approach aligns with the regulatory frameworks seen in other jurisdictions, such as the United States.

According to SEBI, different regulators should oversee activities falling under their respective jurisdictions. Therefore, specific risks associated with each type of digital asset will be addressed.

For example, SEBI would monitor cryptocurrencies classified as securities and initial coin offerings. It will issue licenses for financial products related to these assets. 

The Reserve Bank of India (RBI) would regulate cryptocurrencies backed by fiat currencies. This is due to their closer alignment with traditional banking products.

Additionally, the Insurance Regulatory and Development Authority of India (IRDAI) would oversee insurance products related to digital assets. Meanwhile, the Pension Fund Regulatory and Development Authority (PFRDA) would manage pension issues connected to cryptocurrencies.

Lastly, SEBI outlined that disputes between investors and crypto platforms would fall under the scope of India’s Consumer Protection Act.

The recommendations are generally met by positive responses, especially from the industry. “It is a progressive stance that acknowledges the multifaceted nature of VDAs,” said Edul Patel, CEO of California-based crypto investment platform Murdex. 

“Moreover, it can help in building investor confidence, as a well-regulated environment reduces the likelihood of market abuses and enhances the overall integrity of the ecosystem.”

India’s crypto history

India’s relationship with cryptocurrencies has not been smooth-sailing. In 2018, the RBI banned banks and other financial intermediaries from dealing with cryptocurrency. 

However, this ban was overturned by the Supreme Court in 2020. Following this, the RBI directed financial institutions to adhere strictly to anti-money laundering and foreign exchange regulations.

Moving on, the government prepared a bill in 2021 to ban private cryptocurrencies, but it was never introduced. Instead, the government has been researching a global framework for regulating digital assets. This is particularly apparent during its G20 presidency in 2022. 

Despite the uncertainties, cryptocurrency trading in India has continued to grow. With increasing adoption, the government introduced a tax on crypto transactions in 2022. Now, there’s also a requirement for exchanges to register locally before facilitating transactions.

As of December 2023, the government has issued 15 notices of noncompliance. Currently, only KuCoin and Binance have obtained licenses to restart operations.

RBI’s stance

In contrast to SEBI’s approach, the RBI has maintained a cautious, skeptical stance towards cryptocurrencies. The bank has its concerns regarding how digital assets may impact India’s economic stability. 

Cryptocurrencies are known for their price volatility, which can lead to speculative trading. Furthermore, the largely unregulated nature of its market can lead to bubbles and crashes. This may complicate the RBI’s ability to manage monetary policy and exchange rates.

Another concern is about how cryptocurrencies may facilitate tax evasion, given how difficult it is to track. 

Lastly, cryptocurrencies may pose risks of seigniorage loss. Seigniorage refers to the profit made by a central bank from issuing currency, primarily due to the difference between the face value of money and the cost of producing it. 

Therefore, the bank supports a ban on a particular type of cryptocurrency: stablecoins. They are designed to maintain a stable value relative to a fiat currency or a basket of assets. Find out more about stablecoins in online forums, such as bitcasino’s crypto blog. 

One of the main reasons is that stablecoins threaten monetary stability. It can potentially rival fiat currencies in terms of use for payments and savings. The widespread use of stablecoins could bypass traditional financial systems and regulatory frameworks.