Crypto Trade Among Bourses may be Banned Exchanges’ Underlying Assets

The proposed cryptocurrency Bill is expected to put a blanket ban on exchange-to-exchange transfers, restrict certain types of wallets masking identities, and completely end dealing in cryptocurrencies through Google Chrome extensions that allow users to dabble in more than 4000 crypts, four people familiar with the developments told ET.

The legislation would give new Delhi powers to monitor an exchange’s ledger for foreign exchange transfer. “The government will put in a mechanism to monitor INR outflow where exchanges will have to open up their books to regulators when they tally buy-side and sell side every quarter,” one of these people close to developments said.

The government will only allow Indian exchanges to operate, and investors will be told to move their better monitoring and regulatory oversight, the person said.

“The way it will happen is that exchanges will have the same restrictions as other stock or commodity exchanges on the amount of money that can leave India and how the trade can happen. Currently everything is happening in a regulatory vacuum and one doesn’t know if these exchanges actually have any underlying assets that are being traded on the platforms,” another person aware of the matter told ET.

Industry experts say such a step will be required, especially if the government is looking to regulate cryptocurrency in the county. “There are a couple of ways most Indian exchanges buy or sell cryptocurrency, and it depends on the fiat currency-crypto pair. FEMA (Foreign exchange regulation Act) regulations may get triggered in cases where the underlying currency for the crypto pair is USD or any other fiat currency apart from INR,” said Amit Juju, senior managing director at advisory firm Ankara.

There is also a proposal to have a uniform wallet, something along the lines of a demat account, but that seems to be difficult to implement due to the complex technologies involved. “But investors cannot be allowed to trade among themselves across exchanges,” said another official. This would imply that cryptocurrency transactions would become a closed loop deal, or that transactions would be restricted to a single exchange.

CLOSED LOOP

Some Indian exchanges already operate in a closed loop, preventing investors from transferring crypto-assets off the platform. “The government is formulating rules that will regulate exchanges in a closed loop system, disallowing the transfer of crypto currencies among exchanges and placing restrictions on noncustodial wallets like meta-mask, “an official involved in the discussions said.

“However, stopping meta-mask type noncustodial wallets is impossible; it’s like restricting the internet.”

The bill is also expected to put a complete end to dealing with cryptocurrency through Google Chrome extensions that give users the couple to dabble in 4000-5000cryptos. Decentralized non-custodial wallets allow activities like staking, smart contracts and trading in more than 4000 crypts.

Currently, Indian exchanges only have 200-300 assets listed on their platforms.

The government is also expected to direct Indian users to wind up their holdings with foreign crypto exchanges and move their holding to India and declare them within 60 to 90 days. “Not only will customers be expected to reveal their overseas holdings of such coins, but they will also have to wind up these holding and bring them back to India within 60-90 days, “an officials cited above said.

Cryptocurrency watchers say if finalized, this move will cap growth of the industry in India and make such currencies expensive to hold. “progressive regulation is the need of the hour for India to capitalize on the golden opportunity of crypto, “said Siddharth Sogani, founder, CREBACO, a cryptocurrency research firm. “ It holds the promise of invigorating the economy, creating jobs, improving wealth distribution, gaining a competitive edge in global technology, and moving ahead of China.” Some of the largest players are said to be putting in place processes where investors will not be able to buy or sell anything using cryptocurrencies.

AN ASSET, NOT A CURRENCY

That is, cryptocurrencies can only be used as an asset and not as a currency.

The Reserve Bank of India (RBI) has raised concerns around crypto assets and how they could pose a risk to India’s financial stability in a meeting with the government, regulators including RBI raised concerns about potential use of cryptocurrencies in money laundering.

 Under the new cryptocurrency framework, the government could ask Sebi to regulate cryptocurrencies in India. New regulators may treat cryptocurrencies as an asset/ commodity for all purposes, including taxation, ET first reported on September 3. On May 17, top exchanges told ET that they had approached the government and sought that Sebi, and not the RBI, regulate them.

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