The challenges faced by India’s crypto regulation

Source: The post the challenges faced by India’s crypto regulation has been created, based on the article “Our approach to the regulation of cryptocurrency needs Clarity” published in “Live Mint” on 7th May 2024.

UPSC Syllabus Topic: GS Paper 3 – Internal Security – Security challenges (crypto currency and money laundering)

Context: This article discusses how Sam Bankman-Fried’s crypto exchange FTX collapsed due to fraud, leading to major financial losses. It also describes India’s uncertain regulatory approach to cryptocurrencies, including strict taxes and anti-money laundering rules that haven’t deterred traders effectively.

For details information on Cryptocurrencies in India read this Article here

Sam Bankman-Fried, founder of FTX, was sentenced to 25 years in prison for fraud and conspiracy. FTX’s collapse in November 2022 led to losses of $8 billion for its customers, $1.7 billion for its investors, and $1.3 billion for Alameda lenders. The Challenges Faced by India’s Crypto Regulation

How did the FTX collapse affect the crypto market?

The collapse of FTX severely impacted the crypto market, sinking its value to $796 billion, a two-year low.

This decline came after the market peaked at $3 trillion in November 2021, showing a significant reduction in value.

Following the collapse, cryptocurrencies, like Bitcoin, hit multi-year lows.

The FTX downfall prompted increased regulatory scrutiny, highlighting the need for clearer oversight.

The event led to a general loss of confidence in the crypto industry, affecting exchanges and traders, and reshaped the conversation on digital asset regulation worldwide.

What challenges does India’s crypto regulation face?

Unclear Policy Framework: A comprehensive cryptocurrency bill has been delayed since 2021, leaving the government unable to provide clear guidelines on the legality of digital assets.

High Taxation: In 2022, a 1% tax deducted at source and a 30% capital gains tax were imposed on crypto trading without allowing for loss offsets. These taxes have deterred some traders.

Inclusion in PMLA: A March 2023 notification brought crypto currencies and other digital assets under India’s anti-money laundering law. Its objective was to check money laundering by placing the responsibility of transparency and checks on Indian crypto exchange platforms.

For details information read here

Fragmented Oversight: The Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi), and the government have inconsistent views on cryptocurrencies, with the RBI particularly critical.

Loss of Revenue and Users: High taxes and unclear regulation caused 3-5 million Indian traders to switch to offshore platforms, leading to $3.8 billion in lost trading volume.

Way forward:

India needs clarity on which regulatory body should oversee crypto: RBI, SEBI, or a new hybrid body. The key question is not just who will regulate but why, as other nations like the UK and EU have already implemented clear regulatory frameworks.

For information on Crypto under PMLA read this Article here

Question for practice:

Evaluate the effectiveness of India’s current cryptocurrency regulation, considering factors such as unclear policy frameworks, high taxation, and the loss of revenue and users to offshore platforms.