India Policy Landscape

Transcript

[music] [music] [applause] Hi everyone. Good morning. >> Thank you Rashmi for having me. It's it's an honor to be on the same stage that Vitalik was one hour back. It's sort of like a surreal moment. Uh because he was an icon on how I got into this space. Um this is this is going to be sort of a quick survey on the the policy landscape in India right um it's it's obviously been a journey so uh I've tried to draw it out in a timeline right [snorts] uh we we started with a uh 2013

caution by the RBI now as we know while while Bitcoin came out in 2009 um the first wave of major attention came around 2013, right? And the RBI immediately expressed concerns a variety of risks. We'll we'll come to that uh on on the exact risk they they uh pointed out, but it was largely on the fact that these are volatile assets. There may not be anything backing them. They could get hacked. They could get misused. And so it was a public caution that the RBI set out warning users uh on dealing with these instruments saying that um they

are not backed by any regulatory authority. Right? Some time passed by uh the RBI reiterated those concerns. As we know the ICO boom happened in in uh 2017 18. uh there was a huge uh uptick of uh different coins being launched. the price ran up uh to around I think 20K or so and uh that wave of activity again spurred the RBI to issue more caution notices and ultimately in uh April 2018 the RBI actually issued a a binding circular on all financial institutions

regulated by it saying that you cannot bank crypto in In essence, right, what that what that meant was if you are a bank or a payment service provider, you [snorts] cannot provide payment rails for a crypto transaction or provide an account to an institution that deals in uh crypto assets and obviously that was that was a sort of a catastrophic event for the industry. Uh the fact is that while uh I mean what happened in court ultimately was that the judges expressed the irony that look you say you are crypto and you're outside the banking system but

you're coming to court saying you want the banking system right but I mean the fact of the matter is by 2018 there was no real way to actually uh mine crypto unless you're a professional miner. So you do need a banking system to get on chain. Uh there were by then a number of developers already in India that [snorts] would need uh let's say ETH to pay the gas fees for the work they're doing, right? In addition to of course trading and and speculation and things like that, right? So uh that was challenged by uh the industry body and I was fortunate to be involved in that. Um but in the meantime before the uh

Supreme Court judgment ultimately came out in 2020 that overturned that uh a government committee was constituted to examine what policy we want to lay down for crypto in India. And in Feb 2019 they actually recommended an outright ban on uh crypto assets as a whole. They said that, and as we stand today, it's somewhat unbelievable, but they said that holding crypto could lead to a 10-year imprisonment term, right? And that was a recommendation that was made. And uh fortunately, that never saw the light of

day. uh because in the interim the Supreme Court set aside the Reserve Bank circular saying that look banking is the lifeline of any business. The the activity of crypto itself is not banned and by cutting off banking you're cutting off the lifeline of the business and so there's a constitutional right to trade and do business. Uh so that that was actually the Supreme Court vindicating um uh the entire uh Indian ecosystem for blockchain, right? And uh ultimately that that I think that that created a a a potential skepticism that such a

severe restriction is also liable to be challenged on constitutional grounds if there's going to be a ban. But the ban continued to get discussed. Um in between there were there various enforcement actions. So again one more from the public domain. In June 2021, the enforcement directorate issued a show cause notice to the exchange Wazerex saying that all user deposits and withdrawals to and from between Wazerex and and uh and Binance were allegedly contraventions of the foreign exchange management law that is FEMA. Right? So obviously that that

creates a lot of questions. Is is a mere deposit or withdrawal a violation of the exchange control law? Right now that hasn't yet been decided. It's an ongoing case. Um and then in 22 uh what had happened is a a new tax regime was introduced and by all accounts it appears to be that the ban was shelved in favor of a tax regime that sort of discouraged widespread activity in the space. Uh the tax regime is a flat 30% tax on any gains in crypto uh as well as a 1% withholding tax on any transaction

and there's a restriction on set off and carry forward of losses. Right? So it's by and large considered a very restrictive regime. Um the fact of 1% withholding actually uh impairs liquidity for high frequency trading. And so therefore a market maker uh trying to do a high volume of spot transactions would be out of their liquidity because they're receiving 1% less on every trade. And that's that's in turn sort of led to a very burgeoning futures and options market in crypto because the industry is is taking the position that uh that those are not uh

subject to that tax. Right? So and and that's also coupled with the fact that futures and options in general have got a lot of uh trading volume even in the equity markets. Right? uh in between we've had the RBI launch its own CBDC u which is still live but the pilot launched in in 22 and finally in March 2023 uh for this segment we had uh the AML regime introduced as we all know the FATF has norms around virtual assets and virtual asset service providers uh and India being a country that follows FATF

standards and was subject to a a FATF evaluation coming up also introduced uh this requirement and what that means is if you're a crypto service provider in India you need to get registered with the financial intelligence unit and follow certain compliance measures right now to actually enforce that in December 23 the FIU um went ahead head and in collaboration with the IT ministry uh blocking orders were issued against certain offshore exchanges that were offering services to Indian persons

without being registered because there was a debate as to whether the registration requirement applied only to exchanges in India or also global exchanges which had Indian customers and the FIU's position is if you're serving Indian customers whether you're in India or abroad, you need to uh register with us. And some of those um uh exchanges, basically the largest exchanges in the world were uh blocked. So there was a URL block and an app takedown and some of them chose to come in and register.

Uh so you'll see that in in March 2024, the first of them came in and registered. That was KCoin. Uh followed by a slew of others. Now we've had Binance register, Bybit, Coinbase. Um, and so these exchanges started registering with the Indian FIU, right? In the meantime, uh, of course, we all know about the Wazerex hack that happened in uh, 2024. It was a $230 million hack. And uh what that led to was users exploring legal options to uh protect their asset value held with the exchange. And in October 25, the Madras

High Court in in a case initiated by one of the users seeking to protect their asset value said that uh I put the abbreviation VDA here because it's called virtual digital assets. um in in Indian legal parliament um they are property and uh they can be uh subject to the same protections as any other property. So the court actually ruled that that user's asset could be uh preserved till the time the arbitration was actually decided. Right? We've had then additional FIU blocking action in the meantime against more exchanges. Uh

and by March 2026, 54 crypto service providers had been registered with the FIU, right? And that's a public list that's available now. Things have been getting pretty interesting. As you can see in the timeline, we have a slew of events uh from June to October. So in June the enforcement directorate again initiated a search operation which it announced publicly and put out a press release against u a set of uh companies that were pursuing a remittancebased use case. So this is basically a use case for stable coin remittance into India

where u a person abroad can can um use an app and it's called a stable coin sandwich model. Essentially you come in through foreign currency it is offramp abroad to sorry on-ramp abroad to stable coins. The stable coins come into India with an FIU registered entity and is then offramped into INR into the beneficiaries account. And the entire sort of issue here and the ambiguity is that crypto is not classified under this law. That's the foreign exchange management act. And at the same time there is crossber movement of value. So

there's a potential debate as to whether the foreign exchange management uh reserves are uh being adequately monitored with stable coin transactions. Right? And we've seen the RBI make some speeches in that regard expressing concerns on stable coins as well. But unfortunately what's happening right now is there's a regulation by enforcement approach. Uh the analogy I would use is uh basically the pre-Trump SEC in the US where there was um a slew of actions alleging that certain tokens are securities but at the same time there was no path to go in and register for a

securities offering. Similarly, under the current legal framework, there's no real path to enable a stable coin use case, but the ED at the same time is sort of initiating enforcement proceedings, which leaves the industry in in a tough spot, right? And uh in July 26 um there was an interesting development where a parliamentary standing committee on finance the parliamentary standing committee mentioned that it it was in the context of the securities markets code which is a proposed new law on securities regulation.

uh it it flagged that whether cryptos are going to be securities or not is a debate right and it it recounted the views of different regulators and ultimately I think the picture emerging is that if there is a security with a blockchain layer it's likely to be a security um but the committee expressed concern that there is still ambiguity and uncertainty on this and it mentioned that till the time a policy is framed, the industry could explore a self-regulatory body, right? And so that is that was largely seen by the industry as a positive uh step given that a

high-powered panel is actually recommending self-regulation. Uh so obviously nothing changes overnight. So whether self-regulation could be the pathway to um to a full-fledged regulatory regime right and then we've seen further movements as you know because of the excitement around tokenization globally it's also it's also made its way to India and one of the major Indian states Maharashtra has uh announced its proposal to introduce a law for land tokenization called the delta act and that's going going to be interesting in terms of how that's implemented because right now as we all know uh land

transactions in India are based on paperwork and a physical processes and enabling that through tokenization whether the processes on the subregistar and and other aspects would change or whether maybe an entity can be created that holds the land and units of that entity are then transferred, right? So, we'll have to see how the details come out on that. And then in September 26, again, in keeping with the tokenization wave, uh the SEBI actually launched a project called DMAT 2.0 where certain uh bonds were uh traded

through a tokenized uh method but it was a private blockchain uh tokenization right and uh the way that works is it was actually settled using CBDC. So there was no as far as we know public blockchain element or crypto element involved. it was it was purely uh a private blockchain uh initiative. It is rather and we'll come to uh some aspects around that soon. Right. Now again in October which is actually just last week right the ED put out a press release saying that it has uh gone and and and examined two more um

entities one of which is a again the stable coin sandwich model a remittancebased model and the second one was a group of u a group involving an Indian founder which has set up uh success successful um D5 venture right and it was a BVI structure. There are Indian personnel working as devs. Uh money is being offramped abroad and coming into India. But there were a lot of vague statements being made, if I may say so, in in the press release as to uh the fact that this seems suspicious without clearly making out a case of why

it might actually contravene the Foreign Exchange Management Act. Now, of course, it's just a press release. Uh it's just a search. There is no adjudicator proceeding on that yet. We'll have to wait and see how that plays out. But once again it's like a regulation by enforcement approach. Right? So the overall thread that's been there is that uh in in the policy circles till now is that blockchain is good but crypto is bad. Right? And we see that by the embracing of uh private blockchain initiatives where uh it's a tokenization use cases are being implemented only through

private blockchain initiatives and uh CBDC's but public blockchain initiatives which which have uh more decentralization are so far not being embraced in India. In fact, even in the 2019 report I mentioned, while it recommended an outright ban on crypto, uh it actually had a whole different chapter mentioning the advantages of blockchain, which seems like an inherent contradiction, right? Um I'll just skip to to a quote, right? And we can maybe have have a giveaway for

whoever guesses uh who said this quote, right? Um so I'll just read it out. A public blockchain in particular would require cryptocurrency for it to exist for two reasons. One, because there was just to give you context, there was always a debate as to why can't we just have blockchain? Why do we need crypto? Right? Blockchain seems great because it's a distributed ledger. It has so many benefits. But why are you throwing this crypto bogey in between, right? And this is this is I I thought it was a good articulation and answer to that question. One, to provide an economic incentive for miners. Second, to limit

the amount of transactions a person could spend by applying economic restrictions such as transaction fees. So if there is no cryptocurrency then at least public blockchains would not work. Private chains could if some kind of solution is developed but the blockchain as a system would be severely restricted. >> Yep. [laughter] I'll get in touch with you. So uh yeah it's it's Vitalik's quote from back in 2016 or something from I think Bitcoin magazine or one of his uh speeches back in the day. Right.

Um and and that's of course um a great answer to this that that look ultimately the only reason a public blockchain works is that you have an an incentive for miners or validators to to do that. And the entire advantage of it is uh the decentralization it achieves because if you're going to have a fully private permission chain, you're basically having a database technologies which has existed since the '90s. It's not it's not really uh the breakthrough that was achieved in 2008 which of course has its own use cases and benefits but does it achieve the

same decentralization benefits that uh public blockchains achieved and the answer is probably no. right now just to come to some of the concerns that that government authorities have so far. Um, of course, the potential for illegal uses, the volatility, uh, the fact that there's no central authority, the the fact that there's no central authority behind it. um the fact that in many cases there's no specific regulatory approval uh there's no underlying asset so it's likened to tulips right and of course

hacking right which I guess we don't have much to say for right right now where we stand but uh again the interesting part of that is how much hacking has happened in a fully decentralized uh self-custody environment Of course, it has happened. People have lost their cryptos which which has gone into the garbage and then they've had to contact the municipal authorities to retrieve that. So these are all I mean pros and cons but ultimately the outlook in my view is that with any powerful technology it's a double-edged sword and this is only one side of the story but there's a counter side of the story

right uh where there are uh equivalent advantages as well >> [music]