Portraying the Prospects of Crypto-Regulations in India: An Inclusive

Approach

Aishwarya Mehta

1. INTRODUCTION
Covid-19 has produced an unusual, irreparable and financial disorganisation around the
world. At this point, it is critically important for India to balance its economic situation. The
economy of India has been resentfully affected, therefore, the GDP for the financial year
2020-21 dropped by 7.7%. Further, an unemployment of 20% was observed in the non-rural
India and due to lack of employment opportunities, most of the people are allured by crypto
trading as it enables them to make a supplementary income. Recently, the Finance Minister
Nirmala Sitharaman proclaimed that for the purpose of taxation liabilities, cryptocurrencies
have now been included in the definition of Virtual Digital Asset (VDA). It is necessary that
regulations governing cryptocurrency is framed with an encyclopaedic approach and thus,
below mentioned are few ways of developing regulatory requirements that could address all
the aspects of cryptocurrency in India.

2. ENVIRONMENT
The mining of cryptocurrency demands authentication of work for the purpose of carrying out
and substantiate the transaction. This technique requisites high-power networks for resolving
the complicated calculations, consequently generating a tremendous ineffectual system. The
proportion of carbon dioxide released by such excessive usage of power affects the
environment adversely. Albeit enormous energy consumption of crypto-mining forms the
predominant issue, the escalated usage of coal for the said power-hungry process also
proves akin to the issue. According to research, the yearly carbon footprint of cryptocurrency
is approximately similar to the carbon footprint of Mumbai. Additionally, mining of
cryptocurrencies results in 0.40% of the world’s total electricity consumption. Thus, these
virtual assets definitely work against the principle of Environmental sustainability.

Globally, several responsible investors are pulling back themselves from cryptos due to its
cataclysmic effect. Lately, Elon Musk, CEO of Tesla, proclaimed that Bitcoin drains up a huge
amount of fossil fuels, thus makes it an environmentally weak crypto. Therefore, he
terminated using Bitcoin for the purpose of trading. In spite of that, India has still not taken
any action to regulate the mining of cryptocurrency for its catastrophic effects on environment
sustainability. However, SEBI have issued new guidelines on disclosure norms on
sustainability-related report of all the elite 1,000 listed companies by market capital, which
involves Environment-related disclosures, the regulation of crypto mining seems not to be
affected by the guidelines issues by the SEBI. In spite of the announcement made by the
Government of India (“GOI”) regarding high tax on profits derived from the sale of “Virtual
Digital Assets” , the trading of cryptocurrency is eventually rising. The high growth and
 development of crypto as a virtual asset in India requires stringent regulations to oppress the
individuals involved in trading of crypto to make portfolios enchanting greater environmental
benefits. The regulations should include:
 Rigorous Disclosure Regulations pertaining to mining of cryptocurrency would
stimulate substantial sense of responsibility in the conscious of crypto traders.
Regulation on Environmental sustainability can be added under the SEBI norms on
sustainability-related reporting announced on March,2021.
 Open-ended guidelines on functioning of mining transactions (for traders and
investors respectively) would make mining of cryptocurrency an indisputable process
in terms of environment sustainability.
 An extensive and stringent compliance procedure encouraging mining of
cryptocurrency with an environmentally sustainable method would eventually help in
circumventing from the catastrophic situation. Incorporation of pecuniary penalties
and forbidding the trading of crypto for those who discharges grievous non-
compliance would grasp sense of responsibility in the minds of crypto
traders/investors.
 Encouraging more witted technologies such as Proof-of-Stake (PoS) method would
decrease the detrimental effect of Proof-of-Work method. Additionally, a guide to PoS
would make it reachable and attainable method for crypto traders/investors. This
alteration would assist in regulating the ingression of crypto-miners and encourage
more responsible and adequately equipped crypto-miners.

3. SOCIAL
On the Social front, abrupt transacting competence of crypto has captivated a large number of
people due to financial disturbances in recent times. The grid of cryptocurrency dispenses
impeccable transactions all over the world along with minutest barrier from the financial
regulators. Although, the clash between private and sovereign right over crypto is the
elementary issue pertaining to cryptocurrency in India. The GOI’s viewpoint to centralise the
crypto in an effort to transfer consistency to crypto investors/traders in India would make the
economy restricted. Ultimately, this would withhold India behind other developed countries
and unduly affect the economy of India. The swift capacity of crypto to transact without any
encumbrance from broker is a unique attribute of crypto for traders/investors. Centralisation of
crypto would greatly impact on its unique characteristic, compare it to a car without fuel. Thus,
elevating a decentralised crypto is equivalently crucial to centralised crypto to generate an
equibalance in the market and grapple with the latest developments in the crypto mechanism.

The extensive usage of Ethereum crypto have encouraged investment opportunities like
Decentralised Finance (DeFi). Subsequently, crypto contracts have introduced an innovation-
driven Non Fungible Token (NFT), a substantial and irreplicable asset with distinctive
identities. Decentralized Autonomous Organizations, is another inclining pathway for
 investment with an aim to uplif Indian economy and narrow down the consequences like
depreciation and inflation. Amidst all the innovation-driven technologies, Fintech and DeFi
mechanism of crypto have various analogous risks attached to it. For an Indian framework of
crypto, a flawless regime remitting safety of investors, market solidarity and prevention of
monetary crimes to uplift crypto’s social and economic acceptability are indispensable. The
regulation for crypto must include:
 Navigation and basic framework accompanying resources supplied to
traders/investors through structured mechanism.
 Stringent policies regarding financial safety of crypto traders/investors along with KYC
and anti-money laundering regime in DeFi.
 Stringent capital regulations for crypto that includes minimum capital standards for
non-public banks to sustain liquidity ratio and intercept shortage in the market.
 Strict mechanism for highly volatile private cryptos that allures a lot of investors for a
greater social good.
 It is possible for the market regulators to regulate subsequent transactions by
introducing neo-banking in cryptocurrency framework.

4. GOVERNANCE
The absence of regulatory regime is a stumbling block in governance of cryptocurrency. An
encyclopaedic approach labelling environmental, social, ecological, tax, monetary crimes, and
cybersecurity issues of cryptocurrency is required to have an efficient governance in the
institutions. The regulatory initiatives that can be acquired to make an effective governance of
cryptocurrency includes:
 Regulation of cryptocurrency should be with a multi-lateral perspective; it becomes
crucial to create a central operator so that a well-built regulatory system emerge.
 Observing networks must be fixed to inspect the activities of cryptocurrency
traders/investors in the economy.
 It is pertinent to frame environment and customer friendly regulations so that it allows
the economy to grow and block the stakeholders from the consequences of
illegitimate business.

5. TAXATION
Lately, GOI has kept tax liability for traders/investors of cryptocurrency but didn’t state
anything official regarding legalisation of cryptocurrency. Additionally, the administration has
created a tax slab at rate of 30% on the profits generated from the crypto and 1% TDS on
transmission of digital assets beyond a threshold and gifts are also to be taxed. Such high
rate of tax on crypto can be seen as an acute step of government which can dissuade
investors/traders. Earlier in 2021, when China embargoed cryptocurrencies, it succumbed
their economy with about $6 billion (missed out revenue from crypto mining).
Correspondingly, there was a substantial relocation of investors to nations such as Singapore
 and United States as these countries have lenient rules and regulations for traders/investors
and miners of cryptocurrencies. India by putting in place its own digital currency seems to
walk on the same path adopted by China. However, introduction of digital currency by the
Central Bank of India, Reserve Bank of India (RBI) can be regarded as a positive initiative of
GOI as it boosts virtual economy, blockchain technology which will lead to more economical
and effective currency management institution. Taxation on crypto implies that government is
making use of its power to tax exactly the way it can tax the unaccounted transactions such
as money arising out of gambling activities, betting or any such sources. Further, in no way
means the GOI is legitimizing such activities from which these transactions are emerging.

Globally, various countries have diversified regulations for cryptocurrency. There are
countries that recognise crypto as a legal tender by subordinating the crypto regulation
through amendments in existing laws or thoroughly making a standalone law for
cryptocurrency. Earlier, GOI also mentioned to sanction a standalone law governing
cryptocurrency. The government aspires to regulate the transactions of digital assets but
haven’t formulated any legal framework governing crypto yet. Hence, unless government
formulates an official crypto bill, no crypto regulated institution will be able to deal with those
cryptocurrencies. Before coming up with the crypto bill, the authorities must:
 Request comments and suggestions from the stakeholders and experts.
 The Government should reamend its decision and reduce the tax slab as, in spite of
belief of a ban, there has been an enormous investment in crypto.

6. MONEY LAUNDERING VIA CRYPTOCURRENCY

Few cryptocurrencies such as Monero, Dash and Verge allow utmost privacy, making it
inaccessible to detect the parties involved in the transactions. To put it another way, most of the
cryptocurrencies empower individuals to conceal the source of their income. Although Bitcoin
track down all transactions which are which are kept in an openly distributed database, In 2019,
offenders allegedly laundered $2.8 billion through bitcoin trading. Hence, there is an urgent need
to regulate the aspects of money laundering and cryptocurrency, as compared to the functional
role of the administration in the distribution of fiat currencies. Cryptocurrency is fundamentally a
Peer-to Peer based decentralised platform which allures money launderers for having the overall
cost of cash out technique below 15% of the proceeds of crime, juxtapose to other techniques of
money laundering costing upto 50%. Since all the data related to crypto transactions is
anonymous which makes the source of funds inaccessible and hence it becomes impossible to
put it under the purview of Prevention of Money Laundering Act,2002 (“PMLA”). Moreover, not
capturing the details of each and every transaction violates Section 12 of the PMLA, which inflicts
responsibility on financial organisations and intermediaries to keep record of each and every
transaction. The anonymousness and avaibility, possibly make cryptocurrencies the chosen safe
heaven for illegitimate activities including money laundering. The framework of cryptocurrency
regulations should be regarding:
  Anonymity needs to be removed from the crypto transactions , then only tracking of
virtual accounts which are suspected to be carrying “proceeds of crime”, will be possible
for an institution like the Directorate of Enforcement (hereinafter “ED”).
 Even if GOI doesn’t come with a standalone law for regulation of cryptocurrency, digital
assets should be bound by the PMLA, which includes procedures such as keeping the
records and reporting of suspected transactions.
 Presently, the provisions of PMLA are entirely not sufficient to tackle the issue of money
laundering via cryptocurrency. However, amendment of Section 2(s)(sa) of the PMLA to
incorporate the cryptocurrency business persons within the ambit of “person carrying on
designated business or profession,” leading the exchange service distributor within the
purview of “reporting entity” under Section 2(w)(wa) and imposing “client due
diligence/KYC” requisites on cryptocurrency corporation under Rule 9 of the Prevention
of Money Laundering (Maintenance of Records) Rules, 2005.

7. CONCLUSION
Incubation of virtual assets in India is expanding rapidly. Having economic strike off by the
financial downturn, the GOI have a golden chance to take edge and make the most of
transforming India into a digital space. In order to develop the trustworthiness of
cryptocurrencies, nationally sustainable regulations would generate more sense of security
amongst the mind of investors/traders and governance of corporations from outer dangers. A
comprehensive approach of GOI towards cryptocurrency would encourage the investors to
develop a portfolio after determining all the factors mentioned above. In the long term, this will
aid in tacking the issues relating to the volatility, uncertainty and bring more integrity to these
virtual assets.