Can India also implement a regulatory framework for cryptocurrency similar to the recently approved legislation by the EU called MiCA?

The European Union has brought crypto-assets, crypto-assets issuers and crypto-asset service providers under a regulatory framework through the recently approved regulatory framework named MiCA. India does not recognise cryptocurrency as a legal tender and there is minimal legislation on cryptocurrency. RBI has always shown reluctance towards cryptocurrency. The time is right for a legal regulatory framework as a mere blanket ban may not suffice. 

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THE European Union (EU) has recently approved a new regulatory framework concerning cryptocurrency. Named the Markets in Crypto Assets (MiCA) regulation, it is a one-of-a-kind legislation to regulate cryptocurrency. 

The purpose behind the introduction of the regulation is to deal with cryptocurrencies and their intricacies more holistically. 

The regulation is anticipated to provide the EU with a competitive edge over other developed countries in the rapidly developing field of cryptocurrency and open new avenues of investment in the arena of cryptocurrencies.

The major objective behind enacting MiCA is to harmonise laws applicable to crypto assets, safeguard consumers' interests, ensure financial stability, encourage innovation in the field of cryptocurrencies and related technologies, and cinch a network devoid of cyber incursions, among other things. 

MiCA has been created to root out shady businesses, faulty schemes of investment and crime-related financial transactions. The aim is also to avoid business infirmities that can destabilise the more mainstream banking system.

First proposed in 2020, MiCA defines crypto assets as "a digital representation of a value or a right that may be transferred and stored electronically, using distributed ledger technology or similar technology." 

MiCA presents a generic meaning of crypto assets by not only virtually engulfing all existing cryptocurrencies but also endeavours to take forthcoming cryptocurrencies under its ambit. 

However, this regulation does not take into account those assets that can fall under the purview of existing regulation, such as shares, transferable securities, etc. Additionally, MiCA does not take account of the new digital currency, namely the Digital Euro which is the next step for the European Central Bank.

MiCA has been hailed as a watershed moment in the regulation of digital markets and has sparked a debate as to whether such regulation can be brought into the Indian market as well. At present, India lacks any effective legislation for governing cryptocurrencies.

History of cryptocurrencies in India

India's history of cryptocurrencies began in 2013, when the Reserve Bank of India (RBI) issued an admonition against crypto assets, citing apprehensions of volatility, the risk of foreign attacks, and the susceptibility of illegitimate use. 

Since the materialisation of cryptocurrencies in India, the RBI has been a vocal opponent and has expressed its resentment against them in a multitude of instances. Ironically, the stance taken by the RBI is in contravention of the Ministry of Electronics and Information Technology's (MeitY) declaration, which held that currencies exploiting blockchain technologies are safe. 

In 2018, the RBI issued a circular directing all the entities regulated by it to refrain from dealing in any transactions involving cryptocurrencies. However, the order was struck down by the Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India, stating that a blanket ban on cryptocurrencies violates the fundamental rights of equality and trade under Articles 14 and 19(1)(g) of the Constitution, respectively.

Also read: The walrus and the carpenter: The impact of Terra-LUNA on crypto regulations

Additionally, India is the only country in the world that does not formally recognise cryptocurrencies as valid legal tender but has imposed a tax on them. In her budget speech for the year 2022, finance minister Nirmala Sitaraman introduced a new amendment to the Income Tax Act, 1961, though which Section 115BBH was inserted, which provides for the levying of 30 percent tax on income generated through the transaction of virtual digital assets (VDA), as defined in Section 2 (47A).

Additionally, it provides that no losses incurred by an assessee can be set off in computing tax under the aforementioned provision. Apprehensions have also been raised by financial experts that this could be a detour from implementing the erstwhile order of the RBI banning cryptocurrencies.

Given the inherent volatility and risk associated with virtual digital assets, it will become virtually unfeasible to indulge in any transaction of VDA with such a taxation policy.

Initially, the taxation of VDA was regarded as a first step towards legalising cryptocurrencies in India. However, clearing the air regarding the validity of cryptocurrencies, the finance secretary has said that there are long odds that cryptocurrencies will win legal recognition. He reiterated that India will only have its own digital currency, which will be backed by the Reserve Bank of India.

In 2021, the government introduced The Cryptocurrency and Regulation of Official Digital Currency Bill, which seeks to create a favourable structure for the creation of the official digital currency that will be issued by the RBI. The Bill also defines cryptocurrencies, and the government has the discretion to add or omit any cryptocurrencies from this description.

Furthermore, the Bill provides for banning all private cryptocurrencies having a subsistence in India. Hence, it is evident from the action taken by the RBI and the government that they are reluctant to acknowledge cryptocurrency as legal tender and will continue to do so.

Also read: Our legal system is still not ready to regulate users' behaviour on the metaverse – The Leaflet

Need for a legislative regulation

At present, India lacks a comprehensive legal regime to regulate cryptocurrency and it remains unregulated despite being ubiquitous among the masses. Although cryptocurrencies and its related digital assets are a very nascent and dynamic aspect of the digital market, they have a great affinity to flourish and may bring splendid outcomes for a developing country like India.

The present global market of cryptocurrencies is reckoned at US $3 trillion. The Indian Crypto market is burgeoning with more than 115 Million investors till now, the market valuation stands at ₹400 billion, and it has been assessed to touch the market cap of US $241 million by 2030.

Also, when the unemployment graphs are taking the shape of skyscrapers in India, the crypto market has the potential to provide a financially sound avenue to the people who have lost their jobs due to the pandemic.

Moreover, with the RBI as the governing body for regulation, the existing financial system has been mainly centralised. The system is susceptible to corruption and mismanagement and is not credible enough to rely on. The blockchain technology that underpins cryptocurrencies can actively contribute in decentralising the current system and ensuring transparency.

Also read: Blockchain's potential for transforming corporate governance

Additionally, the government's desire to impose an outright ban on cryptocurrencies is not going to be smooth and prohibiting use of cryptocurrencies will be accompanied by obstacles. To implement such a ban, the government is required to create a robust mechanism for surveillance and determine the location of offenders, which is not possible without loopholes.

It is probable that outlawing may lead to the augmentation of a parallel network of black market and other illicit activities like money laundering and cyber fraud.

The most stressed argument given in banning cryptocurrencies is that it is susceptible to volatility and highly risky, which may be true. In the past few years, investors of cryptocurrencies have gone from riches to rags.

According to a report by the Bank of International Settlement, during the course of 2022, prices of many cryptocurrencies including some prominent ones like Bitcoin and Ether, fell by 75 percent, majorly due to the fall of the largest crypto exchange platform called FTX. A cumulative loss in value of approximately 1.8 billion has been reported by the organisation. 

Regulating cryptocurrencies is likely to resolve the issue of financial risk inherent in the business of its. It will also assist in infusing a sense of acceptance in the minds of crypto investors and facilitate in alleviating the likelihood of risk. 

Hence, there is a need to adopt a realistic and sustainable approach in this regard instead of adopting a rigid stance of prohibition. A full-fledged legal regime recognising cryptocurrencies with strict norms, applications, and appropriate punishment for aberrations is the need of the hour. 

An example can be taken from the economic reforms of 1991, which proved to be effective in dealing with the economic crises and led our country to become the fifth-biggest economy in the world. Thus, we can also accept a new system and move to regulate cryptocurrencies in India. 

Suggestions related to mechanism and implementation of a proper regulation 

First, defining digital assets should be the topmost priority. The definition should be generic and exhaustive without ambiguity, taking existing and futuristic crypto-assets under its ambit. Also, there should be explicit classification of different forms of digital assets like virtual currencies, NFTs, stablecoins (a type of crypto asset that provides a stable price value), etc.

Also read: The treachery of non-fungible tokens (NFTs) – The Leaflet

Second, there should be a stringent mechanism for regulating the authorisation, licensing, and registration of crypto service providers. There should be a lucid demarcation of yardsticks for the storage, transfer, exchange, sale, etc. of cryptocurrencies.

In India, the Security and Exchange Board of India (SEBI) can be an appropriate authority for regulating and defining the code of conduct of intermediaries. The government of India can expand the role of SEBI as a financial regulator of cryptocurrencies to bring transparency to the authorisation and licensing of crypto service providers.

Third, there should be the imposition of additional prudential requirements on crypto service providers, like the publication of a white paper. It ensures the disclosure of information with respect to sale, purchase, exchange, profit and loss to the users.

Such additional requirements may also include insurance coverage for investing firms and safeguard mechanisms (akin to the provisions of MiCA) for alleviating the risk of volatility, maintaining official records, verification of users, and compliance with any other rules to which it may be subject.

Fourth, regulators should also impose apposite liability on crypto service providers in the instance of losses incurred by investors due to their failure to exercise an appropriate code of conduct. With this provision, crypto investors can be protected from the risks arising from cyberattacks, theft and malfunctioning service-provider systems.

Fifth, the regulation should also provide for the strict monitoring, management and reporting of risks in the crypto market that may be incurred by crypto investors. It should also provide for a strong internal control mechanism with administrative procedures. 

To carry out such monitoring and control, there is a need for a competent authority that can possess the power to annex sanctions in the case of any aberration on the part of crypto service providers.