Is India finally ready to regulate crypto? Here are the signs that suggest the answer is yes

Anyone following India's long-running cryptocurrency policy debates from abroad is likely confused, given the extended back-and-forth. To be sure, it has also been confusing to watch from the inside.

The discussion — and angst — around India's crypto policy has played out in various ways during the past few years. First, the Reserve Bank of India (RBI) barred commercial banks from serving anyone dealing with crypto. Then, the Supreme Court of India reversed that RBI policy when the court declared it unconstitutional.

Earlier this year, a crypto bill got listed in Parliament for discussion, and media reports emerged that India would ban crypto. That bill was never presented in Parliament.

Now, a new crypto bill has been listed for discussion in Parliament. The media reports about what it might contain have been mixed. Some reports have said that the bill would impose a ban, while others have said it would only regulate the crypto industry, not ban it.

Given the confusion thus far, speculation about what the government might do next — or even whether it will take any action at all — should be taken with a grain of salt. Still, this time seems different.

For the past few years, media reports concerning crypto bans and regulations have always quoted anonymous government sources, making it difficult to understand the government's true stance on crypto. But in recent months, top government officials — including Prime Minister Narendra Modi — have come forward to publicly comment on crypto.

On the whole, those comments have reflected a cautious optimism rather than the sort of pessimism that has been characteristic of the past. And these remarks suggest that an outright ban on crypto is now unlikely.

A winding road

The government of India officially started discussing cryptocurrency in November 2017 when it set up an inter-ministerial committee under the chairmanship of Subhash Chandra Garg, who was then serving as the secretary of the Department of Economic Affairs within the Ministry of Finance. This committee was tasked to study the crypto sector and propose specific regulatory actions.

In April 2018, just a few months after this committee was formed, the country's central bank issued a policy barring banks and regulated financial institutions from providing services to anyone dealing with cryptocurrencies — effectively closing fiat on and off-ramps.

Soon after the RBI's new policy came out, the Internet and Mobile Association of India (IAMAI) filed a writ petition in the Supreme Court of India to put a stay on it.

In July 2019, the Garg committee submitted its report to the government along with a draft bill. The committee recommended banning crypto in nearly all forms, including trading and holding it. The bill was named "Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019." But it was never introduced by the government in Parliament for discussion.

Meanwhile, India's crypto industry continued its fight against the RBI, and in March 2020, the IAMAI won its case against the RBI in the Supreme Court. The court said the RBI cannot impose restrictions on crypto in the absence of any legislative ban on crypto trading. The court felt that such restrictions would interfere with the fundamental right of citizens to carry out any trade that is not prohibited by law.

Then, earlier this year, the Lok Sabha — the lower house of India's bicameral Parliament — listed a crypto bill for discussion in its bulletin. The bill was titled: "The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021".

The name of this bill implies a change in tone, at least, since it doesn't contain the word ban like the 2019 draft bill. According to the Lok Sabha bulletin, this bill "seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses."

Still, just like the 2019 draft bill, this one was never introduced in Parliament.

At the time, it wasn't clear why the bill wasn't presented. A month later, India's finance minister Nirmala Sitharaman said at a media event that "we are not closing our minds" on crypto.

Sitharaman's comments, along with a bull run in the crypto markets, gave Indian exchanges a cause for hope, and they subsequently went on to raise funds and advertise their offerings heavily. Crypto exchanges, including unicorns CoinSwitch Kuber and CoinDCX, and Binance-owned WazirX, spent funds on TV commercials, full-page newspaper ads featuring Bollywood and sports stars, and influencer marketing.

The splashy advertisements got some unwanted attention, though. In July, Delhi High Court issued a notice to the Indian government to bring guidelines for TV ads of crypto trading platforms.

A turning point?

The notice from the High Court may partially explain why on November 13, Prime Minister Modi held his first-ever meeting on crypto. According to the Press Trust of India (PTI), the participants in the meeting, which included various government officials, concluded that "attempts to mislead the youth through over-promising and non-transparent advertising should be stopped."

The meeting's participants also discussed how unregulated crypto markets cannot be allowed to become avenues for money laundering and terror financing and that "progressive & forward-looking" steps will be taken, government sources told the PTI.

Two days after this meeting, the Parliamentary Standing Committee on Finance, within the legislative branch of the government, held its own crypto meeting with industry stakeholders. This meeting was led by the chairperson of the committee — Jayant Sinha, a member of the Parliament and formerly the Minister of State for Finance and the Minister of State for Civil Aviation. The title of the agenda was "Hearing of views of Associations/ Industry experts on the subject CryptoFinance: Opportunities and Challenges".

Executives of top crypto exchanges, who are all part of the IAMAI's Blockchain and Crypto Assets Council (BACC), attended the meeting — and it seems to have gone well for them.

Ravneet Kaur, CEO of Coinsbit India, told The Block that the conversation with the finance committee was "a positive step in the right direction." WazirX founder and CEO Nischal Shetty agreed that the meeting ended on a positive note. The Block also reached out to CoinDCX and CoinSwitch Kuber. Both the exchanges declined to comment.

After this meeting, Sinha said in a media interview that the finance committee wanted to understand the industry and its challenges and opportunities. He said the committee did not take any particular view on crypto.

But Sinha did share his personal views on crypto and blockchain, calling them "path-breaking" and "game-changing" technologies. "It is very important to balance innovation and regulation," he said.

Three days later, Prime Minister Modi commented on crypto at the Sydney Dialogue. "It is important that all democratic nations work together on [crypto] and ensure it does not end up in [the] wrong hands, which can spoil our youth," he said.

Modi called on democracies to work together "to develop technical and governance standards and norms consistent with our democratic values."

That Modi has stepped in to discuss crypto is significant, and it is a good sign that new policies are coming, several market observers told The Block. They also said that in addition to Modi's comments, another positive sign for the crypto industry has been recent comments from Finance Minister Nirmala Sitharaman. Sitharaman on several occasions has implied that the government does not intend to ban crypto.

The comments by Modi and Sitharaman matter most because these two officials are from the executive branch of the government. It is the executive branch that will ultimately make the final decision on crypto.

Revenue Secretary Tarun Bajaj also recently made comments implying that the government would provide more clarity about how crypto will be taxed. Bajaj told the PTI in an interview that if people are making money on crypto, they will have to pay tax on it.

Ajeet Khurana, former CEO of ZebPay and former head of the BACC, said he believes that the government will provide clarity around crypto taxation and bring in stringent regulations around consumer protection and compliance.

Post-meeting moves

On November 23, the Lok Sabha published a new bulletin listing the same 2021 crypto bill title with the same description. The bill is expected to be introduced in the winter session of Parliament, which began on November 29 and concludes on December 23.

This bill's listing also initially led to reports that it will ban crypto since it "seeks to prohibit all private cryptocurrencies in India." However, other reports have suggested that the government is headed towards regulating crypto, not banning it.

Bloomberg reported last week that according to "people familiar with the matter," India is considering a proposal to treat cryptocurrencies as a financial asset while safeguarding small investors. The legislation may stipulate a minimum amount for investments in cryptocurrencies while banning their use as legal tender, the people said.

Akand Sitra, an employee of blockchain analysis firm TRM Labs, wrote a post on his LinkedIn account last week that after speaking with a "few high-level MoF [Ministry of Finance] officials," he believes that the government will not ban crypto.

Sitra declined to comment to The Block when reached and since then has removed the reference to speaking with officials.

His edited post now says he hopes the bill will contain regulatory measures, including the treatment of crypto as an asset class regulated by India's securities regulator SEBI, and a stipulation that all exchanges must comply with know-your-customer, know-your-transaction, and other risk management practices.

Sitra also said in the post that TRM has given crypto monitoring and forensics training sessions to over 24 Indian agencies in the last seven months and that they are capable of regulating crypto.

On November 25, two days after the bill's listing, Finance Secretary TV Somanathan told CNBC-TV18 in an interview that "people are reading too much" into the brief description of the bill. He did confirm that "crypto will not be legal tender by any means" in India.

The path ahead

If the bill is presented in the winter session, then the Parliament has its process — which involves voting, debating, preparing a Parliamentary committee report and finally getting nods from the Lok Sabha (House of the People) and the Rajya Sabha (Council of States).

If the bill passes the Parliament, it will then go to President of India Ram Nath Kovind for final signature. It can't be said how long the entire process will take.

On November 30, Finance Minister Sitharaman said in a Parliamentary Q&A session that the bill is still being drafted.

"The previous bill has been reworked," she said, referring to the 2021 bill that was listed for introduction in Parliament earlier this year but wasn't introduced. Ajay Seth, secretary of the Department of Economic Affairs within the Ministry of Finance, is drafting the bill, Seth's principal private secretary K Abdulla Syed confirmed to The Block.

Sitharaman explained that rapid developments in the crypto space have called for more changes to be made to the bill from earlier this year and that this is why it wasn't presented. The reworked bill will be presented soon, she said.