New Delhi: The Union government is awaiting an internationally acceptable solution to track and curb clandestine so-called wallet-to-wallet transfers of cryptocurrency before banning them in India, with both the finance ministry and the Reserve Bank of India (RBI) agreeing on their destabilising impact on the country’s financial stability, two officials aware of the matter said. Currently, cryptocurrencies are unregulated in India.
India’s cryptocurrency legislation is a work in progress, but the government is waiting for the Financial Stability Board (FSB) to frame cross-border regulation for cryptocurrencies, the two added, requesting anonymity. A FSB report on the subject is expected in October.
The recent cryptocurrency crash has made more people aware of the risks in dealing with them. Governments, including the Indian one, have also reiterated the exclusive right of the sovereign to issue currency, and also pointed to the use of cryptocurrency in the drug trade, terror funding, and money laundering.
FSB promotes international financial stability and addresses vulnerabilities affecting financial systems. It has 68 member institutions comprising the ministries of finance and central banks from countries such as Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Korea, Saudi Arabia, Singapore, South Africa, Switzerland, UK and USA. India is represented by its finance ministry, the Securities and Exchange Board of India (Sebi) and RBI.
“It is necessary to have some international regulations for cryptocurrencies; otherwise, we can only ban it within the country [India] while the very cryptic nature of cryptocurrency could be leveraged by unscrupulous elements to do cross-border wallet-to-wallet transactions, undetected,” one person with direct knowledge of the matter said.
The finance ministry and RBI did not respond to e-mail queries seeking comment.
FSB, in a statement on July 11, said it “is working to ensure that crypto-assets are subject to robust regulation and supervision” ; the international body is expected to submit a report on this matter to G20 finance ministers and central bank governors in October.
“The recent turmoil in crypto-asset markets highlights their intrinsic volatility, structural vulnerabilities, and the issue of their increasing interconnectedness with the traditional financial system,” FSB said in the statement referring to a recent plunge in prices of various cryptocurrencies.
Minister of state for finance Pankaj Chaudhary on August 2 told Parliament that international collaboration is required “to prevent regulatory arbitrage” as cryptocurrencies are by definition borderless. “Therefore, any policy framework on cryptocurrency can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.”
The government is concerned about misuse of cryptocurrencies in illegal activities such as drug trafficking, terror funding and money laundering, the second person mentioned above said. According to another statement of Chaudhary in the Parliament on the same day, the Directorate of Enforcement (ED) is already investigating two cryptocurrency-related cases against crypto-exchange WazirX.
“In one of the cases, investigation done so far has revealed that one Indian crypto-exchange platform, WazirX, operated by Zanmai Labs Private Limited in India was using the walled infrastructure of Cayman Island based exchange Binance. Further it has been found that all crypto transactions between these two exchanges were not even being recorded on Blockchain and were thus cloaked in mystery. Accordingly, a Show Cause Notice has been issued under the provisions of FEMA against WazirX for allowing outward remittance of crypto assets worth ₹2,790 crore to unknown wallets,” he said.
WazirX on August 6 denied ED’s allegations. On specific queries related to FSB’s report and regulation of cryptocurrency in India, WazirX vice president Rajagopal Menon said: “It is very evident that the government has decided to take a practical approach towards crypto. The government won’t make things easy for the industry but at the same time, no drastic action such as a ban will happen.”
He added: “Prime Minister Narendra Modi has said on numerous occasions that there is a need for countries to work together to regulate crypto. Already we are seeing steps in this direction from the SEC in the United States. The FSB is about to frame rules for crypto regulation in October . This could be the first step towards all G20 countries adopting some form of crypto regulation in a concerted manner.”
Menon said banning cryptocurrencies is difficult. “Authoratarian countries like China have tried banning crypto numerous times to no avail. Furthermore draconian actions such as banning and punitive taxation would only harm the industry and drive consumers to grey markets,” he said.
He contended that clandestine wallet-to-wallet transactions are miniscule. “Its important to remember that most crypto investors leave their crypto parked in exchanges. Only a small fraction, take custody of their coins. Only a small fraction of this is used for illicit activities. According to Chainalysis, a Blockchain analysis company that specialises in crypto and Blockchain analysis, of all transactions made with cryptocurrencies in 2021, 0.15% were associated with some type of illicit activity. The UN estimates that between 2% to 5% of traditional fiat (cash), about $800 billion to $2 trillion in current US dollars, was associated with some type of illicit activity. This begs the question, are we using a sledgehammer when a screw driver would have sufficed?” he asked.