Introduction
Money has seen remarkable evolution since prehistorical times. From barter systems to using commodities as money to using gold and silver currency, money has been an essential component of human history. In the last decades, the internet revolution has shaped the evolution of money. We are phasing into an era of digital currency and transactions, in which the volume of digital transactions has exceeded the value of physical transactions. A relatively new product of this intermingling of money and the internet is cryptocurrency. Starting with Bitcoin in 2008, cryptocurrency has become a significant part of the economy, with a market capitalisation of around $ 1 trillion in 2023. Cryptocurrency can be defined as a decentralised digital money system that works on the blockchain system and is secured by cryptography. In general, cryptocurrencies are not under the control of any government and are not backed by any assets. It makes cryptos a little bit problematic because due to lack of governmental supervision, there is no control over the fluctuations in the value and no control over the reliability of any particular crypto coin. Owing to such insecurity, it threatens investors, who are also increasingly engaging in crypto trading. Therefore, the government must have some form of regulation over this currency. In this article, we will look at the Indian draft laws on cryptocurrencies, examine why they need to be changed, and how Indian lawmakers can take help from the Singaporean system to draft new and effective laws. Cryptocurrencies are of all types; however, the scope of this paper will be limited to cryptocurrencies that possess monetary exchangeability or can be acquired as tradable assets that can be later exchanged for money.
Cryptocurrency Regulation Laws in India
There is no specific law for regulating cryptocurrencies in India but the crypto trading platforms have to comply with the order from the Reserve Bank of India. The attitude of the RBI has not been welcoming towards cryptos and it has warned people on multiple occasions not to invest money in them. In 2017, a committee was appointed by the Ministry of Finance under the chairmanship of Shri Subhash Chandra Garg, Secretary of the Department of Economic Affairs, MFA. The committee finalised the draft bill in 2019, which was named Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. As per the Bill, there was to be a complete blanket ban on cryptocurrencies. Section 3(1) of the draft bill prohibited mining, generation, holding, selling, dealing in, issuing, transferring, disposing of, or using cryptocurrencies in India. Section 4 of the Bill allowed the Central Government to declare ‘Digital Rupee’ as legal tender in India, which was to be governed by the Reserve Bank of India Act, 1934. Section 5 of the Bill empowered the RBI to declare any official foreign digital currency to be recognised as foreign currency in India, and it was to be governed by the Foreign Exchange Management Act 1999. Section 6 prohibited using any crypto as a medium of exchange, store of value, or unit of account. This Bill, if passed, would have created several problems in the country. Firstly, people who have already invested in cryptocurrencies would have suffered a significant loss, and this would perhaps have caused a loss to the economy as well. Secondly, such people would then resort to illegally trading in cryptocurrencies from other countries, leading to an outflow of foreign exchange from India. Lastly, if India wants to become an economic powerhouse, it cannot stay away from cryptocurrency, which, in the opinion of many experts would be the future of monetary systems. In 2020, the Supreme Court struck down the RBI’s ban on cryptocurrency and observed that as cryptocurrencies are not banned in India and pose no discernible risk, the deprivation of Cryptocurrency exchanges from accessing banking and payment channels would be disproportionate. Another cryptocurrency bill was scheduled in the Winter Session of Parliament in 2021 but was not introduced. With growing investments and the decision of the Supreme Court, the government’s attitude seems to have changed a bit. In the 2022 Annual Budget, the Central Government introduced a tax of 30% on the profits arising from the transfer of crypto assets. While it may seem that such a tax would hamper the growth of the crypto market in India, it is actually desirable because it shows an indication that the government has changed its ‘blanket ban’ approach towards crypto and is working to formulate a new mechanism to legalise crypto in the country. Recently, at the G20 summit held in New Delhi, government sources pointed out that a new system of crypto regulation based on global consensus would have to be worked out.
With the change in attitude, it is inevitable that the government will have to introduce some cryptocurrency regulations sooner or later. Before making any such law, it would be advisable for the government to look at such laws in other countries. Singapore is one such country where the government has welcomed cryptocurrency with its friendly regulation, which has turned Singapore into a key hub in Asia for digital currencies. Here, we will try to look at Singapore’s crypto regulation model, which could be used as a base for developing the Indian system.
Singapore’s Cryptocurrency Regulation Model
Before going to Singapore’s crypto regulation model, we first need to understand how cryptocurrency can be appropriately regulated. As mentioned earlier, one of the main features of cryptocurrency is that it needs to be decentralised. For this reason, complete government control over cryptos is out of the book, for it would destroy the whole purpose and identity of cryptocurrency. What is desirable is some type of subtle regulations that reduce the volatility of the cryptocurrency and help to prevent online cryptocurrency fraud while at the same time not having a big impact on its demand-supply chain. Singapore’s laws have both features, making them a reliable model for India.
Cryptocurrencies have various attributes and qualities, therefore, it is difficult to regulate them under a single law. Singapore introduced the Payment Services Act, 2019, which is the main law related to cryptocurrency regulation. However, due to the above reason, some cryptocurrencies are not within the Act’s purview. Such cryptocurrencies are regulated by the nation’s other laws. One primary type of cryptocurrencies exempt from the Payment Services Act, are those having features similar to capital market products or securities. They are regulated by Singapore’s Securities and Futures Act, 2001. As per Part 1 and 2 of Schedule 2 of the Securities and Futures Act, dealing in capital market products, which includes making or offering to make with any person or inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or to acquire, dispose of, entering into, effecting, arranging, subscribing for, or underwriting any capital markets products is regulated and requires license from the concerned authority. ‘Capital market products’ are defined in Section 2 of the Act as ‘any securities, units in a collective investment scheme, derivatives contracts, spot foreign exchange contracts for the purposes of leveraged foreign exchange trading, and such other products as the Authority may prescribe as capital markets products.’ This Section’s scope is vast and covers every type of ‘securities’; therefore, it also deals with cryptocurrencies that possess the features of ‘securities’. Therefore, acquiring, buying, dealing, or disposing of such cryptos in Singapore is regulated and requires a license. Now, coming back to the Payment Services Act, 2019, which, apart from cryptocurrencies, also regulates other forms of online payment. Section 2 of the Act defines ‘digital payment token’, which means any digital representation of value that: a) is expressed as a unit; b) is not denominated in any currency and is not pegged by its issuer to any currency; c) is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of debt; d) can be transferred, stored or traded electronically; and e) satisfies such other characteristics as the authority may prescribe. Most of the popular cryptocurrencies like Bitcoin, Ethereum, and Dogecoin would fall under this definition as they are expressed in units (1 BTC, 5 ETH), are not denominated in any currency or pegged to any currency, are intended to be a medium of exchange or payment of goods or services and are transferred, stored and traded electronically. However, the term ‘digital payment token’ won’t include within its ambit government-issued cryptocurrencies or cryptos like stablecoins that are pegged to a particular currency. To incorporate them, a new term, ‘e-money’, is used in the same Section, which includes any electronically stored monetary value that is denominated in any currency or pegged to any currency. Section 6 of the Act, in conjunction with Schedule 2, stipulates that providing certain services, such as the issuance of electronic money, the exchange of digital payment tokens for currency or other tokens, and the establishment or operation of a digital payment token exchange, necessitate obtaining a license from the relevant regulatory body. Section 5 of the Act penalises any person or company carrying out such an activity without a license. A point to be noted here is that the Act only provides for regulations for the crypto trading platforms, i.e., the exchanges on which crypto is bought and sold or platforms on which the cryptocurrencies are traded. The Act does not regulate any ordinary people or crypto traders who buy them to make some profit. Such regulation is well thought out as it allows the government to keep the crypto situation from getting out of hand (i.e., by regulating the exchanges) while at the same time not impacting demand-supply change by allowing free buying and selling of crypto by traders and other people. E-money is even less regulated as only issuing e-money requires a license. It is because, unlike other cryptos, such coins are pegged to or backed by some real-world currency, which greatly reduces the volatility of such coins. As per the Act, the license can be of two types – standard payment institution license and major payment institution license, depending upon the value of the payment transactions each month. This demarcation, based on value is welcome as it allows different types of regulations on small and big trading platforms depending upon the value of their payment transactions as that determines the impact on the economy.
Overall, the Payment Services Act stands as commendable legislation due to its adaptable scope, capable of encompassing a diverse array of Digital Payment Tokens (DPTs). This flexibility is vital for effectively regulating cryptocurrencies, given their dynamic and distinct nature.
Conclusion
The cryptocurrency market has seen tremendous growth in the last couple of years, and based on such growth, it can be said that the future of cryptos will be very bright. However, such brightness should not blind the eyes of the investors and authorities who need to be vigilant while making decisions. This article tries to show a roadmap to what possible crypto regulation can be, but it is not necessary that such a roadmap would be the best one in the future. As mentioned earlier, cryptos are dynamic; a lot is changing every day and even every second. Due to this, it becomes necessary for both, the government as well as the investors to remain updated. While the Indian government may consider adopting a crypto policy based on the Singaporean model, it must always be prepared to adapt swiftly when necessary. Failure to ensure timely revisions could jeopardise the regulations and may even impact the entire economy. Therefore, adaptability and an active approach will be essential in managing and negotiating through the ever-fluctuating crypto environment and securing a safe and beneficial future for all stakeholders.
