Regulation​ ​Suggestions​ ​for

Cryptocurrencies

Digital​ ​Assets​ ​and​ ​Blockchain​ ​Foundation​ ​of​ ​India

Last​ ​update:​ ​October​ ​2017
Link​ ​for​ ​latest​ ​online​ ​version​ ​or​ ​to​ ​share​ ​this​ ​report:​ h
​ ttps://goo.gl/NZrARJ

1​ ​of​ ​38
Table​ ​of​ ​Contents
Table​ ​of​ ​Contents 2

Summary​ ​Of​ ​Suggested​ ​Regulation 5

Introduction​ ​To​ ​Cryptocurrencies​ ​and​ ​Blockchain 6

Cryptocurrencies 6
Blockchain 6
Puedo​ ​Anonymity 7
Opinions​ ​Of​ ​Leaders​ ​On​ ​Cryptocurrencies​ ​and​ ​Bitcoins 8
India​ ​On​ ​Cryptocurrencies​ ​and​ ​Bitcoins 9
Business​ ​in​ ​India 10
Existing​ ​KYC 10
Denial​ ​of​ ​Banking​ ​Services 10
Co-operation​ ​with​ ​Law​ ​Enforcement​ ​Agencies 11
Challenges​ ​in​ ​identifying​ ​user​ ​transactions 11
Security 11
International​ ​Regulatory​ ​Framework 11
USA 11
European​ ​Union 12
Japan 12
Singapore 12
Switzerland 12
Other​ ​Countries 13
Global​ ​Industry​ ​Snapshot 13
Bitcoin​ ​Trade​ ​Volumes 13
Bitcoin​ ​Market​ ​Cap 14
Transaction​ ​Value​ ​of​ ​Bitcoin​ ​Exchanged​ ​on​ ​Bitcoin​ ​Blockchain 15
Market​ ​Cap​ ​of​ ​all​ ​Cryptocurrencies 16

Conceptual​ ​Framework 16
Identifying​ ​Risks 16
Other​ ​Risks 17

Potential​ ​For​ ​India 19

Reserves​ ​of​ ​a​ ​global​ ​asset 19

2​ ​of​ ​38
 Micro​ ​Remittances 20
Banking​ ​the​ ​unbanked 20
Fintech​ ​Hub 21
Socio​ ​Economic 21

Suggestions​ ​for​ ​Regulation 23

Assumptions 23
Self​ ​Regulating​ ​Organization 23
Code​ ​of​ ​Conduct 23
Operations 24
Composition​ ​of​ ​the​ ​Managing​ ​Committee 25
Membership 26
Corporate​ ​Governance 26
Conflicts​ ​of​ ​Interest 27
Criteria​ ​for​ ​Digital​ ​Asset​ ​Exchanges 27
Minimum​ ​Criteria​ ​For​ ​Registration​ ​of​ ​Exchanges 27
Compliance​ ​by​ ​Registered​ ​Exchanges 28
Other 28
Capital​ ​Requirement​ ​/​ ​Insurance 28
KYC 29
Tier​ ​1​ ​-​ ​Customers​ ​for​ ​whom​ ​No​ ​KYC​ ​is​ ​required 30
Tier​ ​2​ ​-​ ​Customers​ ​for​ ​whom​ ​e-KYC​ ​is​ ​required 30
Tier​ ​3​ ​–​ ​Customers​ ​for​ ​whom​ ​physical​ ​KYC​ ​is​ ​required 30
AML​ ​/​ ​STR 31
Blockchain​ ​Intelligence​ ​Tools 31
Maintenance​ ​of​ ​Records 32
Import​ ​/​ ​Export​ ​of​ ​Cryptocurrencies 32
Exchanges 32
Remittance 33
Taxation 33
Value​ ​Added​ ​Tax​ ​/​ ​GST 33
Income​ ​Tax 34
FDI 34
Government​ ​Industry​ ​Consultation 35
Ponzi​ ​Schemes 35
ICOs 35

3​ ​of​ ​38
Conclusion 36

Contact​ ​Us 37

Update​ ​Log 38

4​ ​of​ ​38
Summary​ ​Of​ ​Suggested​ ​Regulation
● Self​ ​Regulated​ ​Organization:​ ​Mandate​ ​the​ ​industry​ ​to​ ​set​ ​up​ ​SRO​ ​on​ ​lines​ ​of​ ​Payment
Council​ ​of​ ​India
● Minimum​ ​Capital​ ​Requirements:​ ​Have​ ​a​ ​minimum​ ​capital​ ​requirements​ ​for​ ​companies
which​ ​hold​ ​user​ ​funds​ ​in​ ​Rs​ ​or​ ​cryptocurrencies.
● Insurance:​ ​Allow​ ​insurance​ ​companies​ ​to​ ​provide​ ​insurance​ ​cover​ ​for​ ​companies​ ​who
hold​ ​user​ ​funds​ ​in​ ​cryptocurrencies.
● KYC:​ ​Have​ ​a​ ​tiered​ ​KYC​ ​approach​ ​which​ ​increases​ ​in​ ​scope​ ​with​ ​increase​ ​in​ ​trade
volume​ ​of​ ​users.
● AML​ ​/​ ​STR:​ ​Mandate​ ​all​ ​exchanges​ ​to​ ​have​ ​AML​ ​software​ ​for​ ​Rs​ ​transactions.
● AML​ ​/​ ​STR:​ ​Mandate​ ​all​ ​exchanges​ ​to​ ​have​ ​blockchain​ ​analysis​ ​software​ ​for
cryptocurrency​ ​transactions.
● AML​ ​/​ ​STR:​ ​Allow​ ​companies​ ​to​ ​file​ ​STR​ ​to​ ​FIU.​ ​Decide​ ​format​ ​as​ ​it​ ​will​ ​be​ ​different​ ​from
current​ ​financial​ ​institutions.
● Maintenance​ ​of​ ​records:​ ​Mandate​ ​companies​ ​to​ ​store​ ​all​ ​records.
● Import​ ​/​ ​Export:​ ​Allow​ ​exchanges​ ​to​ ​manage​ ​liquidity​ ​by​ ​allowing​ ​them​ ​to​ ​receive​ ​/​ ​make
payments​ ​in​ ​foreign​ ​exchange​ ​for​ ​cryptocurrencies.
● Service​ ​Tax:​ ​Clarify​ ​that​ ​companies​ ​will​ ​pay​ ​service​ ​tax.
● Income​ ​Tax:​ ​Clarify​ ​that​ ​users​ ​will​ ​pay​ ​capital​ ​gain​ ​tax​ ​on​ ​cryptocurrency​ ​profits.
Businesses​ ​will​ ​pay​ ​income​ ​tax.
● VAT​ ​/​ ​GST:​ ​0%​ ​VAT​ ​/​ ​GST​ ​on​ ​sale​ ​or​ ​purchase​ ​of​ ​cryptocurrencies​ ​as​ ​done​ ​globally​ ​in
most​ ​countries.
● FDI:​ ​Allow​ ​FDI​ ​but​ ​limit​ ​it​ ​to​ ​25%.

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Introduction​ ​To​ ​Cryptocurrencies​ ​and​ ​Blockchain

Cryptocurrencies
Bitcoin,​ ​a​ ​cryptocurrency​​ ​that​ ​is​ ​best​ ​known​ ​as​ ​a​ ​peer-to-peer​ ​electronic​ ​payment​ ​system,​ ​is
reputed​ ​to​ ​be​ ​as​ ​revolutionary​ ​as​ ​the​ ​Internet.

The​ ​potential​ ​of​ ​Bitcoin​​ ​and​ ​other​ ​cryptocurrencies​ ​extends​ ​beyond​ ​their​ ​applications​ ​as​ ​units​ ​of
account​ ​or​ ​mediums​ ​of​ ​exchange.​ ​Rather,​ ​the​ ​unique​ ​technological​ ​innovation​ ​common​ ​to​ ​most
cryptocurrencies​ ​is​ ​a​ ​public​ ​ledger​ ​that​ ​functions​ ​as​ ​a​ ​decentralized​ ​system​ ​for​ ​recording
ownership​ ​and​ ​value​ ​transfers.

While​ ​the​ ​technical​ ​operation​ ​of​ ​the​ ​ledger​ ​is​ ​complex,​​ ​the​ ​core​ ​idea​ ​is​ ​rather​ ​simple.​ ​When​ ​an
owner​ ​of​ ​a​ ​cryptocurrency​ ​(which​ ​can​ ​be​ ​described​ ​as​ ​an​ ​electronic​ ​token)​ ​transfers​ ​the
cryptocurrency​ ​to​ ​a​ ​recipient,​ ​the​ ​transaction​ ​is​ ​verified​ ​in​ ​a​ ​process​ ​called​ ​“mining.”​ ​A​ ​crowd​ ​of
“miners”​ ​consults​ ​the​ ​ledger,​ ​verifies​ ​the​ ​owner’s​ ​claim​ ​of​ ​ownership,​ ​and​ ​documents​ ​the
transfer​ ​to​ ​the​ ​recipient,​ ​who​ ​from​ ​now​ ​on​ ​is​ ​logged​ ​on​ ​the​ ​ledger​ ​as​ ​the​ ​owner​ ​of​ ​the
cryptocurrency.​ ​The​ ​verification​ ​process​ ​is​ ​a​ ​competitive​ ​one.​ ​The​ ​miners​ ​do​ ​not​ ​simply​ ​verify
the​ ​transaction;​ ​they​ ​compete​ ​to​ ​solve​ ​a​ ​complex​ ​cryptographic​ ​problem.​ ​The​ ​first​ ​miner​ ​to
succeed​ ​wins​ ​the​ ​competition,​ ​logs​ ​the​ ​transaction​ ​on​ ​the​ ​ledger,​ ​and​ ​is​ ​awarded​ ​a​ ​new​ ​batch​ ​of
cryptocurrencies.​ ​The​ ​new​ ​batch​ ​of​ ​cryptocurrencies​ ​is​ ​automatically​ ​generated​ ​by​ ​the​ ​software
and​ ​functions​ ​both​ ​as​ ​an​ ​incentive​ ​to​ ​participate​ ​in​ ​the​ ​mining​ ​process​​ ​and​ ​as​ ​a​ ​decentralized
mechanism​ ​for​ ​the​ ​issuance​ ​of​ ​new​ ​cryptocurrencies.​ ​Anyone​ ​can​ ​become​ ​a​ ​miner​ ​by
downloading​ ​the​ ​necessary​ ​software.​ ​Cryptocurrency​ ​software​ ​is​ ​open-source​ ​and​ ​generally​ ​not
controlled​ ​by​ ​a​ ​central​ ​entity.​ ​It​ ​is​ ​the​ ​above​ ​process​ ​that​ ​characterises​ ​cryptocurrencies​ ​as
secure​ ​and​ ​immutable​ ​despite​ ​the​ ​absence​ ​of​ ​a​ ​centralised​ ​authority,​ ​which​ ​is​ ​what​ ​lends​ ​trust
to​ ​national​ ​currencies.

Blockchain
The​ ​above​ ​type​ ​of​ ​ledger​ ​powered​ ​by​ ​cryptocurrencies,​ ​also​ ​called​ ​‘blockchain’​ ​gets​ ​its
advantages​ ​of​ ​security​ ​and​ ​immutability​ ​because​ ​it​ ​is​ ​not​ ​controlled​ ​by​ ​any​ ​single​ ​miner​ ​or​ ​a
small​ ​number​ ​of​ ​approved​ ​miners.​ ​Even​ ​the​ ​person​ ​or​ ​entity​ ​which​ ​develops​ ​the​ ​cryptocurrency
would​ ​not​ ​have​ ​control​ ​over​ ​the​ ​ledger​ ​and​ ​will​ ​not​ ​be​ ​able​ ​to​ ​modify​ ​the​ ​ledger.​ ​Miners​ ​are
interested​ ​to​ ​participate​ ​in​ ​the​ ​ecosystem​ ​because​ ​they​ ​are​ ​rewarded​ ​by​ ​the​ ​cryptocurrency.
These​ ​cryptocurrencies​ ​have​ ​a​ ​real​ ​world​ ​value​ ​which​ ​miners​ ​can​ ​sell​ ​and​ ​recover​ ​their
operational​ ​costs.

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For​ ​this​ ​technology​ ​to​ ​fulfill​ ​its​ ​promise​ ​as​ ​advertised,​ ​all​ ​parts​ ​of​ ​the​ ​ecosystem​ ​are
interlinked​ ​and​ ​essential​ ​-​ ​blockchain,​ ​mining​ ​AND​ ​cryptocurrency​ ​with​ ​a​ ​market​ ​driven
value.​ ​It​ ​is​ ​worth​ ​highlighting​ ​that​ ​blockchain​ ​cannot​ ​fulfill​ ​or​ ​will​ ​be​ ​severely​ ​limited​ ​in
its​ ​scope​ ​without​ ​mining​ ​and​ ​an​ ​associated​ ​cryptocurrency​ ​with​ ​market​ ​driven​ ​value​ ​like
Bitcoin​ ​or​ ​Ethereum.

To​ ​summarize,​ ​cryptocurrencies​ ​are​ ​essentially​ ​protocols​ ​that​ ​allow​ ​for​ ​the​ ​validation​ ​of
transactions​ ​without​ ​the​ ​need​ ​for​ ​a​ ​trusted​ ​third​ ​party​ ​such​ ​as​ ​a​ ​bank,​ ​credit​ ​card​ ​company,
escrow​ ​agent,​ ​or​ ​recording​ ​agency.​​ ​As​ ​such,​ ​cryptocurrencies​ ​hold​ ​great​ ​innovative​ ​potential.
They​ ​have​ ​been​ ​described​ ​as​ ​a​ ​“generative”​ ​technology​ ​on​ ​which​ ​powerful​ ​applications​ ​can​ ​be
built.​​ ​For​ ​example,​ ​cryptocurrencies​ ​may​ ​dramatically​ ​reduce​ ​transaction​ ​costs​ ​associated​ ​with
value​ ​transfers,​​ ​engender​ ​access​ ​to​ ​financial​ ​transactions​ ​within​ ​sectors​ ​of​ ​the​ ​population​ ​that
do​ ​not​ ​have​ ​access​ ​to​ ​traditional​ ​financial​ ​institutions,​​ ​avoid​ ​the​ ​pitfalls​ ​of​ ​managed​ ​or
commodity-based​ ​monetary​ ​systems,​​ ​and​ ​allow​ ​for​ ​the​ ​creation​ ​of​ ​self-enforcing​ ​smart​ ​contracts
that​ ​do​ ​not​ ​rely​ ​on​ ​financial​ ​institutions,​ ​lawyers,​ ​or​ ​accountants​ ​for​ ​their​ ​execution.

Cryptocurrencies​ ​are​ ​also​ ​unique​ ​for​ ​other​ ​reasons.

Puedo​ ​Anonymity
Most​ ​cryptocurrencies​ ​are​ ​not​ ​completely​ ​anonymous,​ ​but​ ​are​ ​rather​ ​pseudonymous.​​ ​For
example,​ ​if​ ​the​ ​identity​ ​of​ ​some​ ​wallet​ ​owners​ ​is​ ​known,​ ​it​ ​is​ ​theoretically​ ​possible​ ​to​ ​use​ ​these
known​ ​nodes​ ​in​ ​the​ ​system​ ​to​ ​build​ ​a​ ​“transaction​ ​graph”​ ​that​ ​tracks​ ​each​ ​particular
cryptocurrency.​ ​By​ ​doing​ ​so,​ ​one​ ​could​ ​expose​ ​the​ ​identity​ ​of​ ​owners​ ​of​ ​unknown​ ​wallets​ ​with
which​ ​the​ ​known​ ​wallets​ ​transacted.

It​ ​is​ ​worth​ ​highlighting​ ​that​ ​pseudo​ ​anonymity​ ​is​ ​built​ ​into​ ​cryptocurrencies​ ​by​ ​design.​ ​However
the​ ​purpose​ ​of​ ​this​ ​is​ ​NOT​ ​to​ ​encourage​ ​its​ ​use​ ​in​ ​illegal​ ​activities.​ ​But​ ​because​ ​it​ ​enables
fungibility​ ​which​ ​means​ ​that​ ​all​ ​tokens​ ​are​ ​the​ ​same,​ ​which​ ​is​ ​an​ ​essential​ ​characteristic​ ​of
money.

For​ ​example,​ ​if​ ​every​ ​Rs​ ​token​ ​that​ ​we​ ​would​ ​receive​ ​in​ ​our​ ​bank​ ​account​ ​has​ ​the​ ​history​ ​of​ ​all
the​ ​past​ ​transactions​ ​attached​ ​to​ ​it,​ ​then​ ​as​ ​a​ ​receiver​ ​you​ ​might​ ​not​ ​accept​ ​a​ ​Rs​ ​token​ ​that​ ​has,
say​ ​been​ ​used​ ​by​ ​a​ ​cigarette​ ​company.​ ​If​ ​a​ ​market​ ​starts​ ​differentiating​ ​tokens​ ​based​ ​on​ ​their
past​ ​use,​ ​the​ ​currency​ ​system​ ​will​ ​collapse​ ​as​ ​it​ ​will​ ​lose​ ​fungibility.

In​ ​virtual​ ​currency​ ​networks,​ ​all​ ​transactions​ ​are​ ​public​ ​and​ ​everyone​ ​can​ ​see​ ​the​ ​history​ ​of​ ​all
transactions.​ ​To​ ​prevent​ ​different​ ​values​ ​of​ ​tokens,​ ​that​ ​is,​ ​to​ ​ensure​ ​fungibility,​ ​the​ ​transactions

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have​ ​to​ ​be​ ​made​ ​pseudo​ ​anonymous.​ ​This​ ​means​ ​that​ ​without​ ​effort​ ​on​ ​part​ ​of​ ​users,​ ​the
transactions​ ​are​ ​anonymous.​ ​However​ ​with​ ​a​ ​little​ ​effort,​ ​transactions​ ​will​ ​lose​ ​their​ ​anonymity.

This​ ​is​ ​an​ ​essential​ ​characteristic​ ​of​ ​cryptocurrencies​ ​to​ ​ensure​ ​the​ ​system​ ​works.

Opinions​ ​Of​ ​Leaders​ ​On​ ​Cryptocurrencies​ ​and​ ​Bitcoins

● Quotes​ ​by​ ​Bill​ ​Gates​ ​(Microsoft),​ ​Richard​ ​Branson​ ​(Virgin​ ​Group),​ ​Eric​ ​Schmidt
(Chairman​ ​Google)​ ​https://youtu.be/pWkbXEz9UQU
● Opinion​ ​on​ ​Virtual​ ​Currencies​ ​by​ ​Christine​ ​Lagarde,​ ​Managing​ ​Director​ ​of​ ​IMF
https://www.imf.org/en/News/Articles/2017/09/28/sp092917-central-banking-and-fintech-
a-brave-new-world
● Quote​ ​by​ ​Jeff​ ​Sprecher,​ ​Chairman,​ ​NYSE​ ​https://youtu.be/6JocJNrgeh0
● Quote​ ​by​ ​Vikram​ ​Pandit,​ ​ex-CEO​ ​of​ ​Citi​ ​Group​ ​https://youtu.be/VSaVdvVHdTs

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India​ ​On​ ​Cryptocurrencies​ ​and​ ​Bitcoins
To​ ​the​ ​knowledge​ ​DABFI,​ ​the​ ​only​ ​regulatory​ ​document​ ​specifically​ ​dealing​ ​with
cryptocurrencies​ ​and​ ​bitcoins​ ​are​ ​the​ ​2​ ​RBI​ ​circulars​ ​issued​ ​in​ ​2013​ ​and​ ​again​ ​in​ ​2017.​ ​The​ ​said
circulars​ ​cautions​ ​the​ ​users,​ ​holders​ ​and​ ​traders​ ​of​ ​Cryptocurrencies​ ​(VCs),​ ​including​ ​Bitcoins,
about​ ​the​ ​potential​ ​financial,​ ​operational,​ ​legal,​ ​customer​ ​protection​ ​and​ ​security​ ​related​ ​risks
that​ ​they​ ​are​ ​exposing​ ​themselves​ ​to.

1. https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247
2. https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=39435

The​ ​Payment​ ​and​ ​Settlements​ ​System​ ​Act​ ​2007​ ​and​ ​the​ ​regulations​ ​formulated​ ​thereunder​ ​do
not​ ​refer​ ​to​ ​cryptocurrencies.​ ​Similarly,​ ​though​ ​RBI​ ​has​ ​issued​ ​several​ ​circulars​ ​including​ ​the
Master​ ​Circular​ ​of​ ​2014,​ ​which​ ​regulates​ ​pre​ ​paid​ ​instruments​ ​including​ ​digital​ ​wallets,​ ​there​ ​is
no​ ​mention​ ​with​ ​respect​ ​to​ ​cryptocurrencies​ ​therein.

Cryptocurrencies​ ​are​ ​being​ ​bought​ ​and​ ​sold​ ​in​ ​India​ ​today​ ​by​ ​both​ ​individual​ ​and​ ​corporate
users.​ ​There​ ​are​ ​several​ ​companies​ ​which​ ​offer​ ​a​ ​platform​ ​for​ ​users​ ​to​ ​securely​ ​buy​ ​and​ ​sell
cryptocurrencies.​ ​Predominantly​ ​Bitcoin​ ​and​ ​Ethereum​ ​have​ ​been​ ​the​ ​most​ ​popular
cryptocurrencies.​ ​The​ ​companies​ ​which​ ​offers​ ​such​ ​platforms​ ​are​ ​registered​ ​with​ ​the​ ​Registrar
of​ ​Companies​ ​in​ ​India​ ​and​ ​are​ ​complying​ ​with​ ​the​ ​regulatory​ ​processes​ ​mandated​ ​under​ ​the
Companies​ ​Act.​ ​The​ ​said​ ​companies​ ​are​ ​also​ ​duly​ ​registered​ ​for​ ​payment​ ​of​ ​income​ ​tax​ ​and
service​ ​tax.​ ​These​ ​companies​ ​have​ ​relied​ ​on​ ​self​ ​regulation​ ​to​ ​ensure​ ​that​ ​the​ ​platforms​ ​are​ ​not
misused​ ​for​ ​money​ ​laundering​ ​or​ ​other​ ​illegal​ ​purposes.​ ​To​ ​this​ ​end,​ ​the​ ​companies​ ​have
policies​ ​for​ ​verifying​ ​large​ ​transactions;​ ​have​ ​put​ ​in​ ​place​ ​KYC​ ​norms;​ ​ensure​ ​that​ ​all
transactions​ ​are​ ​linked​ ​to​ ​and​ ​completed​ ​only​ ​through​ ​bank​ ​accounts.

In​ ​addition​ ​to​ ​the​ ​above,​ ​some​ ​of​ ​the​ ​companies​ ​have​ ​approached​ ​various​ ​regulatory​ ​authorities
for​ ​clarification​ ​on​ ​requisite​ ​compliances.

For​ ​instance,​ ​the​ ​company​ ​Zeb​ ​IT​ ​Service​ ​Pvt​ ​Ltd,​ ​sought​ ​for​ ​clarifications​ ​from​ ​RBI,​ ​DGFT,
FMC​ ​on​ ​their​ ​positions​ ​and​ ​guidelines​ ​on​ ​cryptocurrencies.

● On​ ​4th​ ​March,​ ​2016,​ ​RBI​ ​replied​ ​that​ ​“bitcoins​ ​are​ ​not​ ​recognized​ ​as​ ​currency​ ​in​ ​India.”

● On​ ​31st​ ​May,​ ​2016,​ ​RBI​ ​responded​ ​that​ ​the​ ​company​ ​“may​ ​seek​ ​clarification​ ​from​ ​DGFT
as​ ​to​ ​whether​ ​bitcoins​ ​can​ ​be​ ​considered​ ​as​ ​goods​ ​or​ ​services.​ ​In​ ​case​ ​the​ ​company

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 intends​ ​to​ ​trade​ ​in​ ​bitcoins​ ​as​ ​commodity,​ ​the​ ​said​ ​company​ ​may​ ​seek​ ​clarification​ ​from
the​ ​Forwards​ ​Market​ ​Commission​ ​(FMC).”

● On​ ​18th​ ​July​ ​2016,​ ​RBI​ ​responded​ ​stating​ ​that​ ​“bitcoins​ ​/​ ​cryptocurrencies​ ​has​ ​not​ ​been
defined​ ​under​ ​section​ ​2​ ​of​ ​FEMA​ ​Act,​ ​1999.”

● On​ ​22nd​ ​September,​ ​2016,​ ​DGFT​ ​replied​ ​in​ ​a​ ​letter​ ​asking​ ​the​ ​Department​ ​of​ ​Financial
Services​ ​to​ ​take​ ​necessary​ ​action,​ ​as​ ​deemed​ ​fit.

The​ ​persons​ ​and/or​ ​entities​ ​dealing​ ​in​ ​cryptocurrencies​ ​have​ ​therefore​ ​complied​ ​with​ ​limited
regulatory​ ​processes​ ​currently​ ​in​ ​place​ ​and​ ​with​ ​the​ ​much​ ​more​ ​stringent​ ​self​ ​regulatory
processes​ ​formulated​ ​by​ ​them,​ ​drawing​ ​substantially​ ​from​ ​global​ ​best​ ​practices.

Business​ ​in​ ​India

● ~6​ ​cryptocurrency​ ​exchange​ ​companies
● ~Rs​ ​1,000​ ​crores​ ​exchange​ ​volume​ ​per​ ​month
● ~10​ ​lac​ ​users
● ~0.5%​ ​-​ ​2%​ ​transaction​ ​charge
● ~10x​ ​growth​ ​per​ ​annum

To​ ​put​ ​in​ ​above​ ​in​ ​perspective,​ ​global​ ​cryptocurrency​ ​exchange​ ​is​ ​~Rs​ ​30,000​ ​crores​ p
​ er​ ​day​.

Existing​ ​KYC
All​ ​current​ ​cryptocurrency​ ​exchange​ ​companies​ ​allow​ ​users​ ​to​ ​buy​ ​and​ ​sell​ ​only​ ​after​ ​doing
KYC.​ ​KYC​ ​includes​ ​PAN​ ​card​ ​and​ ​bank​ ​account​ ​details​ ​of​ ​users.​ ​All​ ​transactions​ ​are​ ​done​ ​via
banking​ ​channels​ ​only.

Denial​ ​of​ ​Banking​ ​Services

Cryptocurrency​ ​exchange​ ​companies​ ​are​ ​facing​ ​challenges​ ​in​ ​their​ ​banking​ ​relationships.​ ​Banks
are​ ​denying​ ​banking​ ​services​ ​to​ ​business​ ​entities​ ​purely​ ​on​ ​the​ ​basis​ ​that​ ​such​ ​entities​ ​are
dealing​ ​in​ ​Cryptocurrencies​ ​such​ ​as​ ​Bitcoin.​ ​They​ ​are​ ​forcing​ ​the​ ​company​ ​to​ ​voluntarily​ ​close
bank​ ​accounts.​ ​There​ ​are​ ​instances​ ​of​ ​more​ ​than​ ​10​ ​bank​ ​accounts​ ​closed​ ​of​ ​3​ ​cryptocurrency
companies.​ ​In​ ​light​ ​of​ ​committee​ ​preparing​ ​the​ ​recommendation​ ​report,​ ​banks​ ​should​ ​be
informed​ ​that​ ​banking​ ​services​ ​cannot​ ​be​ ​denied​ ​to​ ​such​ ​entities.

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Co-operation​ ​with​ ​Law​ ​Enforcement​ ​Agencies
Cryptocurrency​ ​companies​ ​have​ ​already​ ​proven​ ​that​ ​they​ ​can​ ​be​ ​helpful​ ​to​ ​law​ ​enforcement
agencies​ ​to​ ​go​ ​after​ ​illicit​ ​use​ ​cases.​ ​There​ ​are​ ​examples​ ​where​ ​these​ ​companies​ ​have​ ​helped
Cybercrime​ ​departments​ ​in​ ​various​ ​cities​ ​to​ ​resolve​ ​cases.

Challenges​ ​in​ ​identifying​ ​user​ ​transactions

● Buy​ ​and​ ​sell​ ​transactions​ ​done​ ​by​ ​users​ ​with​ ​cryptocurrency​ ​exchanges​ ​are​ ​easily
identified​ ​to​ ​users.
● Challenges​ ​are​ ​there​ ​in​ ​tracking​ ​transactions​ ​if​ ​done​ ​by​ ​users​ ​later​ ​on​ ​blockchain.

Security
● Public​ ​blockchains​ ​are​ ​the​ ​most​ ​secured​ ​networks​ ​that​ ​exist​ ​today.
● Cryptocurrency​ ​platforms​ ​run​ ​by​ ​companies​ ​use​ ​existing​ ​security​ ​processes​ ​like​ ​other
technology​ ​companies.​ ​These​ ​processes​ ​are​ ​being​ ​improved​ ​continuously​ ​as​ ​the
companies​ ​are​ ​maturing​ ​in​ ​size​ ​and​ ​scale.

International​ ​Regulatory​ ​Framework

Some​ ​of​ ​the​ ​regulatory​ ​documents​ ​and​ ​developments​ ​in​ ​other​ ​countries​ ​are​ ​given​ ​below.

USA
● Financial​ ​Crimes​ ​Enforcement​ ​Network​ ​(FinCEN),​ ​United​ ​States​ ​Department​ ​of​ ​the
Treasury’s​ ​guidance​ ​on​ ​cryptocurrencies.
(https://www.virtualcurrencyreport.com/2014/10/fincen-issues-new-rulings-covering-virtu
al-currency-exchanges-and-payment-processors/)

● Global​ ​Advisors​ ​Bitcoin​ ​Investment​ ​Fund​ ​(GABI)​ ​is​ ​the​ ​first​ ​regulated​ ​bitcoin​ ​hedge​ ​fund
to​ ​receive​ ​regulatory​ ​approval​ ​from​ ​the​ ​Jersey​ ​Financial​ ​Services​ ​Commission​ ​(JFSC).
(​http://www.bbc.com/news/world-europe-jersey-28247796​)

● New​ ​York​ ​State​ ​Department​ ​of​ ​Financial​ ​Services​ ​(NYSDFS)​ ​started​ ​issuing​ ​BitLicense
to​ ​businesses​ ​related​ ​to​ ​virtual​ ​currency​ ​activities.
(​http://www.dfs.ny.gov/legal/regulations/bitlicense_reg_framework.htm​,
http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf​)

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 ● Coinbase​ ​launched​ ​the​ ​first​ ​regulated​ ​bitcoin​ ​exchange​ ​in​ ​the​ ​U.S.
(​http://www.wsj.com/articles/first-u-s-bitcoin-exchange-set-to-open-1422221641​)

● Winklevoss​ ​brothers’​ ​bitcoin​ ​exchange,​ ​Gemini,​ ​had​ ​been​ ​granted​ ​a​ ​license​ ​by​ ​the​ ​New
York​ ​State​ ​Department​ ​of​ ​Financial​ ​Services.
(​http://fortune.com/2015/10/05/gemini-winklevoss-bitcoin/​)

European​ ​Union
● European​ ​Union’s​ ​top​ ​court,​ ​European​ ​Court​ ​of​ ​Justice,​ ​ruled​ ​that​ ​exchanging​ ​bitcoin
should​ ​be​ ​exempt​ ​from​ ​value-added​ ​tax​ ​in​ ​the​ ​same​ ​way​ ​as​ ​traditional​ ​money.
(​https://curia.europa.eu/jcms/upload/docs/application/pdf/2015-10/cp150128en.pdf​)

● Bitstamp​ ​to​ ​be​ ​the​ ​first​ ​fully​ ​licensed​ ​bitcoin​ ​exchange​ ​in​ ​Europe,​ ​w.e.f.​ ​July​ ​1,​ ​2016.​ ​It
has​ ​been​ ​granted​ ​the​ ​license​ ​by​ ​Luxembourg​ ​Financial​ ​Industry​ ​Supervisory
Commission​ ​(CSSF).
(​http://www.forbes.com/sites/laurashin/2016/04/25/7886/#9bc9a36518de​)

Japan
Japan​ ​passed​ ​a​ ​law​ ​on​ ​1st​ ​April​ ​2017​ ​that​ ​defines​ ​Bitcoin​ ​and​ ​other​ ​virtual​ ​currency​ ​as​ ​a​ ​form​ ​of
payment​ ​method,​ ​not​ ​a​ ​legally-recognized​ ​currency.​ ​Bitcoin​ ​will​ ​continue​ ​to​ ​be​ ​treated​ ​as​ ​an
asset​ ​unless​ ​there​ ​are​ ​future​ ​revisions​ ​or​ ​directives​ ​to​ ​Japanese​ ​tax​ ​law.
(​https://bravenewcoin.com/news/bitcoin-regulation-overhaul-in-japan/​,
http://www.fsa.go.jp/news/28/ginkou/20170324-1.html​)

Singapore
Inland​ ​Revenue​ ​Authority​ ​of​ ​Singapore​ ​(IRAS)​ ​has​ ​issued​ ​tax​ ​guidelines​ ​for​ ​Bitcoins​ ​stating​ ​that
businesses​ ​that​ ​choose​ ​to​ ​accept​ ​cryptocurrencies​ ​such​ ​as​ ​Bitcoins​ ​for​ ​their​ ​remuneration​ ​or
revenue​ ​are​ ​subject​ ​to​ ​normal​ ​income​ ​tax​ ​rules.
(​https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-Income-Taxe
s/Specific-topics/Income-Tax-Treatment-of-Virtual-Currencies/​)

Switzerland
● Zug​ ​becomes​ ​the​ ​first​ ​town​ ​in​ ​which​ ​you​ ​can​ ​pay​ ​city​ ​fees​ ​(taxes)​ ​in​ ​bitcoin
(​http://www.dw.com/en/alpine-crypto-valley-pays-with-bitcoins/a-19371082​?)
● Swiss​ ​National​ ​Railway​ ​SBB​ ​sells​ ​bitcoins​ ​at​ ​all​ ​its​ ​offices
(​https://www.sbb.ch/en/station-services/services/further-services/bitcoin.html​)

12​ ​of​ ​38

Other​ ​Countries
https://coin.dance/poli#legalitybycountry
https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country#cite_note-TOI_noreg-17

Global​ ​Industry​ ​Snapshot

Bitcoin​ ​Trade​ ​Volumes

Bitcoin​ ​trade​ ​volume​ ​is​ ​~US$​ ​0.5​ ​billion​ ​per​ ​day​ ​rising​ ​rapidly​ ​(September​ ​2017)

13​ ​of​ ​38

Bitcoin​ ​Market​ ​Cap

Bitcoin​ ​market​ ​capital​ ​is​ ​~US$​ ​80​ ​billion​ ​(September​ ​2017)

14​ ​of​ ​38

Transaction​ ​Value​ ​of​ ​Bitcoin​ ​Exchanged​ ​on​ ​Bitcoin​ ​Blockchain

Value​ ​of​ ​bitcoins​ ​exchanged​ ​on​ ​bitcoin​ ​blockchain​ ​has​ ​crossed​ ​US$​ ​1​ ​billion​ ​per​ ​day
(September​ ​2017).

15​ ​of​ ​38

Market​ ​Cap​ ​of​ ​all​ ​Cryptocurrencies

Market​ ​cap​ ​of​ ​all​ ​cryptocurrencies​ ​has​ ​crossed​ ​US$​ ​150​ ​billion​ ​(September​ ​2017).

Conceptual​ ​Framework
Cryptocurrencies​ ​offer​ ​tremendous​ ​opportunities​ ​for​ ​innovation​ ​and​ ​development.​ ​This​ ​however
comes​ ​with​ ​some​ ​risks,​ ​which​ ​include​ ​possible​ ​illicit​ ​use​ ​of​ ​cryptocurrencies​ ​as​ ​also​ ​the​ ​market
risks​ ​of​ ​volatility.​ ​The​ ​potential​ ​of​ ​cryptocurrencies,​ ​as​ ​well​ ​as​ ​the​ ​risks​ ​therefore​ ​mandate​ ​a
suitable​ ​regulation,​ ​which​ ​would​ ​help​ ​reduce​ ​the​ ​illegal​ ​use​ ​of​ ​cryptocurrencies​ ​and​ ​provide
better​ ​transparency​ ​and​ ​certainty.

Identifying​ ​Risks
1. Use​ ​of​ ​cryptocurrencies​ ​for​ ​money​ ​laundering.
This​ ​has​ ​been​ ​addressed​ ​by​ ​the​ ​companies​ ​providing​ ​a​ ​platform​ ​for​ ​trading​ ​by​ ​doing​ ​KYC​ ​and
verifying​ ​large​ ​transactions.

2. Use​ ​of​ ​cryptocurrencies​ ​for​ ​illegal​ ​activities.​ ​The​ ​recent​ ​WannaCry​ ​ransomware​ ​attack
and​ ​reports​ ​of​ ​use​ ​of​ ​cryptocurrencies​ ​in​ ​the​ ​darknet​ ​have​ ​tainted​ ​cryptocurrencies.
Regulating​ ​cryptocurrencies​ ​will​ ​help​ ​in​ ​tracking​ ​such​ ​transactions​ ​more​ ​effectively.​ ​Software
solutions​ ​to​ ​track​ ​and​ ​attach​ ​identities​ ​to​ ​transactions​ ​are​ ​already​ ​available​ ​in​ ​markets.​ ​Use​ ​of
such​ ​software​ ​is​ ​similar​ ​to​ ​AML​ ​softwares​ ​available​ ​for​ ​national​ ​currencies.

16​ ​of​ ​38

 3. Ponzi​ ​schemes​ ​launched​ ​disguised​ ​as​ ​cryptocurrencies.
The​ ​cryptocurrencies​ ​by​ ​themselves​ ​do​ ​not​ ​amount​ ​to​ ​ponzi​ ​schemes.​ ​However,​ ​there​ ​are
reports​ ​of​ ​possible​ ​promotion​ ​of​ ​cryptocurrencies​ ​by​ ​some​ ​persons​ ​/​ ​entities​ ​through​ ​multi​ ​level
marketing​ ​process.​ ​This​ ​again​ ​has​ ​grown​ ​in​ ​the​ ​absence​ ​of​ ​suitable​ ​regulation.​ ​If​ ​specific
guidelines​ ​are​ ​set​ ​out​ ​in​ ​this​ ​regard,​ ​it​ ​is​ ​likely​ ​to​ ​reduce​ ​the​ ​possibility​ ​of​ ​such​ ​schemes​ ​being
perpetuated.

4. Possibility​ ​of​ ​fly​ ​by​ ​night​ ​operators.

The​ ​success​ ​of​ ​established​ ​cryptocurrencies​ ​has​ ​led​ ​to​ ​scamsters​ ​cheating​ ​users​ ​by​ ​launching
fake​ ​currencies​ ​where​ ​the​ ​promoters​ ​manipulate​ ​the​ ​price​ ​and​ ​exit​ ​after​ ​making​ ​large​ ​profits.
Regulation​ ​which​ ​would​ ​mandate​ ​registration​ ​of​ ​companies​ ​dealing​ ​in​ ​cryptocurrencies​ ​would
keep​ ​out​ ​such​ ​fly​ ​by​ ​night​ ​operators​ ​and​ ​protect​ ​innocent​ ​users.

5. New​ ​cryptocurrencies​ ​being​ ​launched​ ​(ICOs)​ ​which​ ​are​ ​similar​ ​to​ ​stocks​ ​and​ ​not
decentralized​ ​cryptocurrencies​ ​like​ ​bitcoin​ ​and​ ​ether.
There​ ​are​ ​global​ ​guidelines​ ​which​ ​are​ ​already​ ​being​ ​developed​ ​to​ ​differential​ ​decentralized
cryptocurrencies​ ​that​ ​power​ ​blockchains​ ​vs​ ​digital​ ​tokens​ ​that​ ​are​ ​company​ ​stock​ ​disguised​ ​as
cryptocurrency.​ ​Regulators​ ​can​ ​apply​ ​‘The​ ​Howey​ ​Test’​ ​to​ ​identify​ ​this.

Other​ ​Risks
1. Volatility
One​ ​further​ ​risk​ ​which​ ​arises​ ​through​ ​legal​ ​trading​ ​in​ ​cryptocurrencies​ ​is​ ​of​ ​possible​ ​volatility,
which​ ​is​ ​driven​ ​by​ ​typical​ ​market​ ​forces.​ ​As​ ​with​ ​stock​ ​market​ ​trading,​ ​regulation​ ​would​ ​ensure
that​ ​prices​ ​are​ ​purely​ ​driven​ ​by​ ​market​ ​forces​ ​only​ ​and​ ​not​ ​manipulated.

Volatility​ ​is​ ​a​ ​reflection​ ​of​ ​very​ ​low​ ​liquidity​ ​in​ ​bitcoin.​ ​As​ ​liquidity​ ​in​ ​bitcoin​ ​is​ ​increasing,​ ​the
volatility​ ​is​ ​reducing.​ ​It​ ​is​ ​predicted​ ​that​ ​in​ ​a​ ​couple​ ​of​ ​years,​ ​the​ ​volatility​ ​will​ ​match​ ​that​ ​of​ ​major
currency​ ​pairs.

The​ ​below​ ​graph​ ​shows​ ​(​btcvol.info​)​ ​the​ ​volatility​ ​index​ ​of​ ​bitcoin​ ​/​ ​USD​ ​and​ ​USD​ ​/​ ​EUR.​ ​It
shows​ ​that​ ​bitcoin​ ​volatility​ ​has​ ​kept​ ​reducing​ ​every​ ​year​ ​as​ ​the​ ​market​ ​capitalization​ ​and
liquidity​ ​have​ ​kept​ ​increasing.

17​ ​of​ ​38

 2.​ ​Cryptocurrencies​ ​could​ ​be​ ​used​ ​to​ ​avoid​ ​tax.
Regulations​ ​which​ ​include​ ​clarity​ ​on​ ​reporting​ ​by​ ​users​ ​or​ ​traders​ ​on​ ​income​ ​tax​ ​and​ ​penal
provisions​ ​on​ ​non​ ​disclosure​ ​would​ ​increase​ ​compliance.

18​ ​of​ ​38

Potential​ ​For​ ​India

Reserves​ ​of​ ​a​ ​global​ ​asset

All​ ​nations​ ​compete​ ​to​ ​increase​ ​reserves​ ​of​ ​global​ ​assets.​ ​For​ ​example,​ ​national​ ​currencies​ ​like
USD,​ ​precious​ ​metals​ ​like​ ​gold​ ​and​ ​precious​ ​commodities​ ​like​ ​oil.

Cryptocurrencies​ ​represent​ ​a​ ​new​ ​global​ ​asset​ ​class.​ ​Before​ ​cryptocurrencies,​ ​digital​ ​things​ ​did
not​ ​enjoy​ ​such​ ​recognition​ ​as​ ​assets.​ ​This​ ​was​ ​because​ ​anything​ ​digital​ ​like​ ​music​ ​or​ ​movies
can​ ​be​ ​replicated​ ​at​ ​negligible​ ​cost.​ ​Also​ ​the​ ​digital​ ​copy​ ​is​ ​an​ ​exact​ ​replica​ ​of​ ​the​ ​original.

For​ ​the​ ​first​ ​time​ ​in​ ​the​ ​history​ ​of​ ​computer​ ​science,​ ​cryptocurrencies​ ​allowed​ ​the​ ​creation​ ​of​ ​a
digital​ ​asset,​ ​which​ ​guarantees​ ​integrity​ ​through​ ​a​ ​protocol,​ ​which​ ​provides​ ​absolute
authentication​ ​processes.​ ​That​ ​the​ ​asset​ ​is​ ​limited​ ​in​ ​quantity​ ​adds​ ​a​ ​necessary​ ​characteristic
for​ ​anything​ ​to​ ​be​ ​considered​ ​as​ ​an​ ​asset.

Based​ ​on​ ​the​ ​technology​ ​that​ ​drives​ ​bitcoins,​ ​there​ ​are​ ​now​ ​more​ ​than​ ​1,000​ ​cryptocurrencies
(​https://coinmarketcap.com​).

These​ ​cryptocurrencies​ ​have​ ​a​ ​global​ ​value.​ ​In​ ​future,​ ​they​ ​have​ ​the​ ​potential​ ​to​ ​increasingly​ ​be
a​ ​part​ ​of​ ​a​ ​nation’s​ ​reserve.

Cryptocurrencies​ ​are​ ​created​ ​by​ ​a​ ​process​ ​called​ ​mining.​ ​Mining​ ​is​ ​already​ ​a​ ​multi​ ​billion​ ​dollar
industry​ ​in​ ​China,​ ​US​ ​and​ ​Scandinavian​ ​countries.​ ​Mining​ ​needs​ ​specialised​ ​computer
processing​ ​chips​ ​and​ ​electricity​ ​to​ ​run​ ​them.​ ​It​ ​is​ ​already​ ​spawning​ ​innovation​ ​in​ ​chip​ ​design​ ​and
renewable​ ​energy​ ​in​ ​China​ ​as​ ​rewards​ ​from​ ​cryptocurrencies​ ​adds​ ​to​ ​the​ ​incentive​ ​for
innovation​ ​in​ ​chip​ ​design,​ ​energy​ ​efficiency​ ​in​ ​computing​ ​and​ ​renewable​ ​energy.

Nations,​ ​which​ ​do​ ​not​ ​act​ ​expeditiously​ ​to​ ​definitively​ ​recognize​ ​cryptocurrencies​ ​run​ ​the​ ​risk​ ​of
limiting​ ​their​ ​reserves​ ​of​ ​a​ ​potential​ ​global​ ​asset​ ​and​ ​cutting​ ​short​ ​the​ ​potential​ ​economic​ ​and
innovative​ ​activity​ ​this​ ​industry​ ​will​ ​spur​ ​in​ ​future.

(​http://www.cnbc.com/2015/11/03/bitcoin-to-be-6th-largest-reserve-currency-by-2030-research.h
tml​)

19​ ​of​ ​38

Micro​ ​Remittances
India​ ​is​ ​the​ ​world’s​ ​largest​ ​inward​ ​remittance​ ​market​ ​at​ ​more​ ​than​ ​$70​ ​billion​ ​per​ ​year.​ ​The
current​ ​remittance​ ​business​ ​model​ ​means​ ​setting​ ​up​ ​a​ ​payment​ ​channel​ ​end-to-end​ ​from​ ​the
country​ ​of​ ​origin​ ​to​ ​India.​ ​Most​ ​companies​ ​in​ ​this​ ​business​ ​are​ ​non​ ​Indian​ ​companies​ ​like
PayPal​ ​and​ ​Western​ ​Union.​ ​Due​ ​to​ ​regulations,​ ​this​ ​business​ ​suffers​ ​from​ ​lack​ ​of​ ​competition.
Due​ ​to​ ​high​ ​transaction​ ​costs​ ​and​ ​lack​ ​of​ ​competition,​ ​non​ ​Indian​ ​remittance​ ​companies​ ​charge
5-20%.​ ​The​ ​current​ ​procedure​ ​also​ ​makes​ ​it​ ​almost​ ​impossible​ ​to​ ​send​ ​remittances​ ​below​ ​$200.
It​ ​is​ ​widely​ ​acknowledged​ ​that​ ​cryptocurrencies​ ​can​ ​significantly​ ​bring​ ​down​ ​transaction​ ​costs,
the​ ​amount​ ​which​ ​will​ ​go​ ​to​ ​lower​ ​and​ ​middle​ ​class​ ​Indian​ ​families​ ​rather​ ​than​ ​non​ ​Indian
companies.

Countries​ ​like​ ​Philippines​ ​have​ ​acknowledged​ ​this​ ​potential​ ​and​ ​have​ ​recently​ ​allowed​ ​local
companies​ ​to​ ​use​ ​bitcoins​ ​for​ ​remittances.
(​https://www.forbes.com/sites/chynes/2017/02/27/new-guidelines-give-bitcoin-startups-in-the-phi
lippines-a-fighting-chance/#6accdba03e4d​,
http://www.bsp.gov.ph/downloads/regulations/attachments/2017/c944.pdf​).

Banking​ ​the​ ​unbanked

The​ ​Internet​ ​helped​ ​fulfil​ ​our​ ​nation’s​ ​dream​ ​of​ ​allowing​ ​our​ ​citizens​ ​to​ ​communicate​ ​to​ ​each
other.​ ​Cryptocurrencies​ ​have​ ​the​ ​potential​ ​to​ ​help​ ​our​ ​nation​ ​realize​ ​its​ ​dream​ ​of​ ​financial
inclusion.​ ​It​ ​is​ ​far​ ​more​ ​efficient​ ​to​ ​open​ ​email​ ​accounts​ ​than​ ​post​ ​box​ ​accounts.​ ​Similarly,
opening​ ​cryptocurrency​ ​accounts​ ​is​ ​like​ ​opening​ ​email​ ​accounts.​ ​It​ ​is​ ​instant​ ​and​ ​free.​ ​Like​ ​the
Internet,​ ​cryptocurrency​ ​networks​ ​are​ ​more​ ​efficient​ ​than​ ​traditional​ ​payment​ ​networks.

Although​ ​it​ ​might​ ​be​ ​economically​ ​unfeasible​ ​to​ ​open​ ​bank​ ​accounts​ ​or​ ​serve​ ​the​ ​poor​ ​through
traditional​ ​financial​ ​institutions,​ ​with​ ​cryptocurrencies​ ​it​ ​is​ ​easier.​ ​This​ ​new​ ​industry​ ​has​ ​the
potential​ ​to​ ​bank​ ​the​ ​unbanked​ ​and​ ​provide​ ​them​ ​modern​ ​financial​ ​services​ ​at​ ​costs​ ​lower​ ​than
currently​ ​possible.

(​https://www.forbes.com/sites/chynes/2017/04/21/virtual-currencies-could-spread-financial-inclu
sion-one-mobile-phone-at-a-time/#21fe24b8239b​)

20​ ​of​ ​38

Fintech​ ​Hub
In​ ​the​ ​last​ ​decade,​ ​India​ ​became​ ​one​ ​of​ ​the​ ​technology​ ​hubs​ ​in​ ​the​ ​world​ ​due​ ​to​ ​the​ ​availability
of​ ​a​ ​large​ ​number​ ​of​ ​English​ ​speaking​ ​engineers.​ ​However,​ ​India​ ​also​ ​aspires​ ​to​ ​be​ ​a​ ​financial
hub​ ​like​ ​London,​ ​Singapore,​ ​Hong​ ​Kong​ ​or​ ​Shanghai.

The​ ​Internet​ ​disrupted​ ​and​ ​created​ ​global​ ​leaders​ ​in​ ​every​ ​industry​ ​it​ ​touched.​ ​For​ ​example,
news,​ ​television,​ ​music,​ ​photography​ ​and​ ​so​ ​on.

With​ ​cryptocurrencies,​ ​the​ ​Internet​ ​has​ ​touched​ ​the​ ​financial​ ​industry.​ ​Cryptocurrencies​ ​are​ ​the
result​ ​of​ ​the​ ​intersection​ ​of​ ​technology​ ​and​ ​finance.​ ​With​ ​India’s​ ​leadership​ ​in​ ​technology,
cryptocurrencies​ ​gives​ ​India​ ​a​ ​chance​ ​at​ ​becoming​ ​a​ ​global​ ​financial​ ​hub.

Financial​ ​hubs​ ​like​ ​UK,​ ​Switzerland,​ ​Singapore​ ​and​ ​South​ ​Korea​ ​have​ ​already​ ​realized​ ​this.
1. UK’s​ ​FCA​ ​and​ ​Singapore​ ​already​ ​have​ ​sandbox​ ​programs​ ​for​ ​bitcoin​ ​businesses.
(​https://www.finextra.com/newsarticle/29480/fca-to-kickstart-sandbox-with-24-applicants​,
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/FinTech-Reg
ulatory-Sandbox.aspx​,
http://coinjournal.net/singapores-bitx-joins-fca-fintech-sandbox-sets-sights-european-mar
ket/​)
2. Switzerland​ ​is​ ​at​ ​the​ ​forefront​ ​of​ ​trying​ ​to​ ​become​ ​a​ ​bitcoin​ ​powerhouse.
(​http://www.reuters.com/article/us-swiss-fintech-cryptovalley-idUSKCN11E0L9​)
3. South​ ​Korea​ ​(​https://news.bitcoin.com/korea-cryptocurrency-fintech-hub/​)

Socio​ ​Economic
The​ ​Internet​ ​or​ ​the​ ​smartphone​ ​was​ ​not​ ​banned​ ​due​ ​to​ ​its​ ​misuse​ ​in​ ​illegal​ ​activities​ ​like​ ​terrorist
communication​ ​or​ ​piracy.​ ​If​ ​it​ ​would​ ​be,​ ​nations​ ​would​ ​have​ ​missed​ ​the​ ​chance​ ​to​ ​use​ ​the
Internet​ ​to​ ​allow​ ​poor​ ​people​ ​to​ ​communicate​ ​at​ ​near​ ​zero​ ​cost,​ ​allow​ ​farmers​ ​to​ ​check​ ​prices​ ​of
their​ ​produce​ ​and​ ​allow​ ​India​ ​to​ ​become​ ​a​ ​technology​ ​hub.

With​ ​infrastructure​ ​technologies​ ​like​ ​the​ ​Internet,​ ​the​ ​smartphone​ ​and​ ​cryptocurrencies,​ ​it​ ​will​ ​be
better​ ​economics​ ​to​ ​chase​ ​the​ ​bad​ ​actors​ ​rather​ ​than​ ​disallowing​ ​the​ ​technology​ ​merely
because​ ​some​ ​misuse​ ​the​ ​same.

By​ ​making​ ​it​ ​illegal​ ​to​ ​operate​ ​a​ ​technology,​ ​one​ ​only​ ​disallows​ ​legitimate​ ​use​ ​of​ ​the​ ​technology.
It​ ​does​ ​not​ ​make​ ​difference​ ​to​ ​the​ ​illegal​ ​players,​ ​as​ ​the​ ​technology​ ​is​ ​accessible​ ​to​ ​them
irrespective.​ ​Banning​ ​cryptocurrencies​ ​would​ ​stop​ ​all​ ​the​ ​legitimate​ ​benefits​ ​in​ ​a​ ​nation.​ ​Since

21​ ​of​ ​38

cryptocurrencies​ ​are​ ​available​ ​to​ ​anyone​ ​using​ ​the​ ​Internet,​ ​this​ ​could​ ​lead​ ​to​ ​an​ ​increase​ ​in
unreported​ ​and​ ​illegal​ ​trading​ ​and​ ​usage.​ ​This​ ​could​ ​lead​ ​to​ ​apps​ ​hosted​ ​outside​ ​the​ ​country​ ​to
continue​ ​servicing​ ​cryptocurrency​ ​–​ ​trade,​ ​as​ ​they​ ​have​ ​the​ ​option​ ​to​ ​get​ ​paid​ ​in​ ​cryptocurrency
itself.​ ​This​ ​unreported​ ​income​ ​would​ ​be​ ​fuelled​ ​to​ ​other​ ​criminal​ ​activities​ ​or​ ​would​ ​be​ ​funneled
overseas.​ ​This​ ​could​ ​cause​ ​a​ ​loss​ ​of​ ​both​ ​capital​ ​and​ ​taxes.​ ​Since​ ​there​ ​would​ ​be​ ​no​ ​legitimate
national​ ​cryptocurrency​ ​exchanges,​ ​the​ ​government​ ​would​ ​lose​ ​visibility,​ ​control​ ​over​ ​the
industry​ ​and​ ​loss​ ​of​ ​economic​ ​activity,​ ​capital​ ​and​ ​taxes.

Further​ ​trading​ ​of​ ​cryptocurrencies​ ​by​ ​registered​ ​companies​ ​ensures​ ​transparency.​ ​Companies
involved​ ​in​ ​trading​ ​of​ ​cryptocurrencies​ ​have​ ​predominantly​ ​been​ ​following​ ​due​ ​process​ ​of
ensuring​ ​KYC​ ​norms​ ​are​ ​met​ ​and​ ​insisting​ ​on​ ​transactions​ ​being​ ​routed​ ​only​ ​through​ ​banking
channels.​ ​Derecognizing​ ​them​ ​is​ ​likely​ ​to​ ​gravely​ ​impact​ ​such​ ​transparency​ ​and​ ​would
adversely​ ​affect​ ​enforcement​ ​against​ ​violators​ ​or​ ​persons​ ​using​ ​cryptocurrencies​ ​for​ ​illegal
purposes.​ ​Banning​ ​cryptocurrencies​ ​would​ ​further​ ​merely​ ​drive​ ​users​ ​underground​ ​making
tracking​ ​and​ ​enforcement​ ​nearly​ ​impossible.

22​ ​of​ ​38

Suggestions​ ​for​ ​Regulation

Assumptions
The​ ​following​ ​assumptions​ ​and​ ​qualifications​ ​form​ ​the​ ​basis​ ​for​ ​the​ ​recommendations:

First,​ ​that​ ​criminal​ ​activity​ ​ought​ ​not​ ​to​ ​form​ ​the​ ​basis​ ​for​ ​regulating​ ​cryptocurrencies.​ ​Regulation
ought​ ​to​ ​be​ ​for​ ​the​ ​purpose​ ​of​ ​protecting​ ​the​ ​average​ ​user,​ ​benefitting​ ​from​ ​this​ ​innovation​ ​and
protecting​ ​against​ ​ponzi​ ​schemes​ ​commenced​ ​under​ ​the​ ​guise​ ​of​ ​cryptocurrencies.

Second,​ ​it​ ​is​ ​assumed​ ​that​ ​the​ ​privacy​ ​or​ ​financial​ ​anonymity​ ​is​ ​an​ ​integral​ ​part​ ​of
cryptocurrencies​ ​and​ ​regulation​ ​will​ ​not​ ​be​ ​able​ ​to​ ​take​ ​away​ ​this​ ​trait.​ ​Suitable​ ​checks​ ​and
balances​ ​may​ ​however​ ​be​ ​put​ ​in​ ​place​ ​to​ ​protect​ ​against​ ​misuse​ ​or​ ​to​ ​prosecute​ ​the​ ​same.

Finally,​ ​the​ ​regulatory​ ​framework​ ​assumes​ ​that,​ ​if​ ​no​ ​new​ ​regulatory​ ​costs​ ​are​ ​imposed​ ​on​ ​the
legitimate​ ​use​ ​of​ ​cryptocurrencies,​ ​the​ ​market​ ​will​ ​allow​ ​the​ ​new​ ​technology​ ​to​ ​develop​ ​to​ ​the
extent​ ​that​ ​it​ ​offers​ ​benefits​ ​(other​ ​than​ ​anonymity)​ ​that​ ​fiat​ ​currencies​ ​do​ ​not.

Self​ ​Regulating​ ​Organization

Industry​ ​sets​ ​up​ ​a​ ​Self​ ​Regulating​ ​Organization​ ​on​ ​the​ ​lines​ ​of:
Association​ ​of​ ​Mutual​ ​Funds​ ​of​ ​India
Fixed​ ​Income​ ​Money​ ​Market​ ​Dealers​ ​Association​ ​of​ ​India
Payment​ ​Council​ ​of​ ​India

Code​ ​of​ ​Conduct

One​ ​of​ ​the​ ​objects​ ​of​ ​the​ ​organisation​ ​is​ ​to​ ​promote​ ​the​ ​investors’​ ​interest​ ​by​ ​defining​ ​and
maintaining​ ​high​ ​ethical​ ​and​ ​professional​ ​standards​ ​in​ ​the​ ​cryptocurrency​ ​industry.

The​ ​Code​ ​of​ ​Ethics​ ​sets​ ​out​ ​the​ ​standards​ ​of​ ​good​ ​practices​ ​to​ ​be​ ​followed​ ​by​ ​the​ ​Companies​ ​in
their​ ​operations​ ​and​ ​in​ ​their​ ​dealings​ ​with​ ​investors.​ ​ ​The​ ​Code​ ​has​ ​been​ ​drawn​ ​up​ ​to
encourage​ ​standards​ ​higher​ ​than​ ​those​ ​prescribed​ ​by​ ​various​ ​regulators.

INTEGRITY

23​ ​of​ ​38

Members​ ​and​ ​their​ ​key​ ​personnel,​ ​in​ ​the​ ​conduct​ ​of​ ​their​ ​business​ ​shall​ ​observe​ ​high​ ​standards
of​ ​integrity​ ​and​ ​fairness​ ​in​ ​all​ ​dealings​ ​with​ ​investors​ ​regulatory​ ​and​ ​other​ ​government
authorities.

DUE​ ​DILIGENCE
Members​ ​in​ ​the​ ​conduct​ ​of​ ​their​ ​business​ ​shall​ ​at​ ​all​ ​times
• render​ ​high​ ​standards​ ​of​ ​service
• exercise​ ​due​ ​diligence
• exercise​ ​independent​ ​professional​ ​judgement​ ​and​ ​act​ ​in​ ​good​ ​faith

Members​ ​shall​ ​have​ ​and​ ​employ​ ​effectively​ ​adequate​ ​resources​ ​and​ ​procedures​ ​which​ ​are
needed​ ​for​ ​the​ ​conduct​ ​of​ ​business​ ​activities.

DISCLOSURES
Members​ ​shall​ ​ensure​ ​timely​ ​dissemination​ ​of​ ​adequate,​ ​accurate,​ ​and​ ​explicit​ ​information
presented​ ​in​ ​a​ ​simple​ ​language​ ​about​ ​the​ ​objectives,​ ​policies,​ ​financial​ ​position​ ​and​ ​general
affairs​ ​of​ ​the​ ​business.

PROFESSIONAL​ ​SELLING​ ​PRACTICES

Members​ ​shall​ ​not​ ​use​ ​any​ ​unethical​ ​means​ ​to​ ​sell,​ ​market​ ​or​ ​induce​ ​any​ ​investor​ ​to​ ​buy​ ​their
product.​ ​Members​ ​shall​ ​not​ ​make​ ​any​ ​exaggerated​ ​statement​ ​regarding​ ​performance​ ​of​ ​their
product.

Members​ ​shall​ ​endeavour​ ​to​ ​ensure​ ​that​ ​at​ ​all​ ​times

● investors​ ​are​ ​provided​ ​with​ ​true​ ​and​ ​adequate​ ​information​ ​without​ ​any​ ​ ​misleading​ ​or
exaggerated​ ​claims​ ​to​ ​investors​ ​about​ ​their​ ​capability​ ​to​ ​render​ ​certain​ ​services​ ​or​ ​their
achievements​ ​in​ ​regard​ ​to​ ​services​ ​rendered​ ​to​ ​other​ ​clients,
● Complaints​ ​from​ ​investors​ ​are​ ​fairly​ ​and​ ​expeditiously​ ​dealt​ ​with.

Operations
Members​ ​shall​ ​avoid​ ​conflicts​ ​of​ ​interest​ ​in​ ​managing​ ​the​ ​affairs​ ​of​ ​the​ ​business
Members​ ​shall​ ​not​ ​be​ ​party​ ​to
● creating​ ​a​ ​false​ ​market,
● price​ ​rigging​ ​or​ ​manipulation
● passing​ ​of​ ​price​ ​sensitive​ ​information
● take​ ​action​ ​which​ ​is​ ​unethical​ ​or​ ​unfair​ ​to​ ​investors.

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Employees,​ ​officers​ ​and​ ​directors​ ​of​ ​the​ ​Members​ ​shall​ ​not​ ​work​ ​as​ ​agents/​ ​brokers​ ​for​ ​selling,
except​ ​in​ ​their​ ​capacity​ ​as​ ​employees​ ​of​ ​the​ ​Member​ ​or​ ​the​ ​Trustee​ ​Company.

UNFAIR​ ​COMPETITION
Members​ ​shall​ ​not​ ​make​ ​any​ ​statement​ ​or​ ​become​ ​privy​ ​to​ ​any​ ​act,​ ​practice​ ​or​ ​competition,
which​ ​is​ ​likely​ ​to​ ​be​ ​harmful​ ​to​ ​the​ ​interests​ ​of​ ​other​ ​Members​ ​or​ ​is​ ​likely​ ​to​ ​place​ ​other​ ​Members
in​ ​a​ ​disadvantageous​ ​position​ ​in​ ​relation​ ​to​ ​a​ ​market​ ​player​ ​or​ ​investors.

OBSERVANCE​ ​OF​ ​STATUTES,​ ​RULES​ ​AND​ ​REGULATIONS

Members​ ​shall​ ​abide​ ​by​ ​the​ ​letter​ ​and​ ​spirit​ ​of​ ​the​ ​provisions​ ​of​ ​the​ ​Statutes,​ ​Rules​ ​and
Regulations​ ​which​ ​may​ ​be​ ​applicable​ ​and​ ​relevant​ ​to​ ​the​ ​activities​ ​carried​ ​on​ ​by​ ​the​ ​Members.

FAIR​ ​PRACTICES​ ​CODE

Members​ ​shall​ ​abide​ ​by​ ​the​ ​provisions​ ​of​ ​the​ ​Fair​ ​Practices​ ​code​ ​which​ ​may​ ​be​ ​applicable​ ​and
relevant​ ​to​ ​the​ ​activities​ ​carried​ ​on​ ​by​ ​the​ ​Members.​ ​The​ ​VCCI​ ​shall​ ​in​ ​due​ ​course​ ​publish​ ​the
Fair​ ​Practices​ ​Code​ ​for​ ​its​ ​members.

ENFORCEMENT
Members​ ​shall:
● widely​ ​disseminate​ ​the​ ​Code​ ​to​ ​all​ ​persons​ ​and​ ​entities​ ​covered​ ​by​ ​it
● make​ ​observance​ ​of​ ​the​ ​Code​ ​a​ ​condition​ ​of​ ​employment
● make​ ​violation​ ​of​ ​the​ ​provisions​ ​of​ ​the​ ​code,​ ​a​ ​ground​ ​for​ ​revocation​ ​of​ ​ ​contractual
arrangement​ ​without​ ​redress​ ​and​ ​a​ ​cause​ ​for​ ​disciplinary​ ​action
● require​ ​that​ ​each​ ​officer​ ​and​ ​employee​ ​of​ ​the​ ​Member​ ​sign​ ​a​ ​statement​ ​that​ ​he/​ ​she​ ​has
received​ ​and​ ​read​ ​a​ ​copy​ ​of​ ​the​ ​Code
● establish​ ​internal​ ​controls​ ​and​ ​compliance​ ​mechanisms,​ ​including​ ​assigning​ ​supervisory
responsibility​ ​designate​ ​one​ ​person​ ​with​ ​primary​ ​responsibility​ ​for​ ​exercising​ ​compliance
with​ ​power​ ​to​ ​fully​ ​investigate​ ​all​ ​possible​ ​violations​ ​and​ ​report​ ​to​ ​competent​ ​authority
● file​ ​regular​ ​reports​ ​to​ ​the​ ​relevant​ ​authorities​ ​on​ ​a​ ​half​ ​yearly​ ​and​ ​annual​ ​basis​ ​regarding
observance​ ​of​ ​the​ ​Code​ ​and​ ​special​ ​reports​ ​as​ ​circumstances​ ​require
● maintain​ ​records​ ​of​ ​all​ ​activities​ ​and​ ​transactions​ ​for​ ​at​ ​least​ ​three​ ​years,​ ​which​ ​records
shall​ ​be​ ​subject​ ​to​ ​review​ ​by​ ​the​ ​Trustees
● dedicate​ ​adequate​ ​resources​ ​to​ ​carrying​ ​out​ ​the​ ​provisions​ ​of​ ​the​ ​Code

Composition​ ​of​ ​the​ ​Managing​ ​Committee

The​ ​Articles​ ​of​ ​Association​ ​of​ ​a​ ​Self​ ​Regulatory​ ​Organisation​ ​shall​ ​provide​ ​the​ ​following:
● There​ ​shall​ ​be​ ​a​ ​Board​ ​of​ ​the​ ​Self​ ​Regulatory​ ​Organization​ ​and​ ​majority​ ​of​ ​Board
Members​ ​shall​ ​be​ ​independent.

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 ● The​ ​Independent​ ​Directors​ ​shall​ ​not​ ​be​ ​required​ ​to​ ​hold​ ​any​ ​qualification​ ​shares.
● The​ ​General​ ​Superintendence,​ ​direction​ ​and​ ​management​ ​of​ ​the​ ​affairs​ ​of​ ​the​ ​Self
Regulatory​ ​Organization​ ​shall​ ​vest​ ​in​ ​its​ ​Board​ ​of​ ​Directors,​ ​which​ ​may​ ​exercise​ ​all
powers​ ​and​ ​do​ ​all​ ​acts​ ​and​ ​things​ ​which​ ​may​ ​be​ ​exercised​ ​or​ ​done​ ​by​ ​the​ ​Self
Regulatory​ ​Organization.
● There​ ​shall​ ​be​ ​a​ ​Chairman,​ ​who​ ​shall​ ​be​ ​an​ ​independent​ ​professional,​ ​appointed​ ​by
Board​ ​of​ ​Directors,​ ​with​ ​the​ ​prior​ ​approval​ ​of​ ​the​ ​Board.
● The​ ​Chairman​ ​shall​ ​be​ ​responsible​ ​for​ ​day-to-day​ ​administration​ ​of​ ​Self​ ​Regulatory
Organization​ ​and​ ​implementing​ ​the​ ​decisions​ ​of​ ​Board​ ​of​ ​Directors.
● The​ ​Board​ ​of​ ​Directors​ ​may​ ​establish​ ​committees​ ​including​ ​disciplinary​ ​committee,
screening​ ​committee,​ ​arbitration​ ​committee​ ​or​ ​remuneration​ ​committee​ ​in​ ​order​ ​to​ ​carry
out​ ​the​ ​purposes​ ​of​ ​these​ ​regulations.
● The​ ​Board​ ​of​ ​Directors​ ​of​ ​the​ ​Self​ ​Regulatory​ ​Organization​ ​shall​ ​be​ ​reconstituted​ ​as​ ​and
when​ ​required​ ​by​ ​the​ ​Board.

Membership
Any​ ​application​ ​for​ ​registration​ ​or​ ​renewal​ ​of​ ​registration​ ​as​ ​an​ ​intermediary​ ​with​ ​the​ ​Board
under​ ​the​ ​respective​ ​regulations​ ​applicable​ ​to​ ​such​ ​intermediaries,​ ​shall​ ​in​ ​case​ ​of​ ​any​ ​applicant
who​ ​is​ ​a​ ​member​ ​of​ ​a​ ​Self​ ​Regulatory​ ​Organization​ ​or​ ​who​ ​ought​ ​to​ ​be​ ​a​ ​member​ ​of​ ​a​ ​Self
Regulatory​ ​Organization,​ ​be​ ​made​ ​only​ ​through​ ​the​ ​Self​ ​Regulatory​ ​Organization​ ​of​ ​which​ ​he​ ​is
a​ ​member,​ ​in​ ​the​ ​specified​ ​manner.

Corporate​ ​Governance
In​ ​a​ ​mutual​ ​or​ ​cooperative​ ​ownership​ ​model,​ ​the​ ​owners​ ​are​ ​usually​ ​members​ ​or​ ​participants
regulated​ ​by​ ​the​ ​SRO,​ ​so​ ​membership​ ​or​ ​participation​ ​also​ ​defines​ ​the​ ​jurisdiction​ ​of​ ​the
organization.​ ​Corporate​ ​governance​ ​of​ ​SROs​ ​is​ ​a​ ​critical​ ​issue​ ​because​ ​the​ ​composition​ ​of​ ​the
board​ ​of​ ​directors​ ​and​ ​related​ ​governance​ ​policies​ ​determine​ ​how​ ​major​ ​decisions​ ​on​ ​corporate
policy​ ​are​ ​made.​ ​Those​ ​decisions​ ​include​ ​selection​ ​of​ ​management,​ ​setting​ ​corporate​ ​strategy
and​ ​overall​ ​regulatory​ ​policy,​ ​adoption​ ​of​ ​rules,​ ​and​ ​deciding​ ​the​ ​approach​ ​to​ ​supervision
programs​ ​and​ ​enforcement.

The​ ​most​ ​significant​ ​corporate​ ​governance​ ​issues​ ​at​ ​SROs​ ​concern​ ​the​ ​degree​ ​of
independence​ ​an​ ​SRO​ ​should​ ​have​ ​from​ ​its​ ​owners,​ ​regulated​ ​persons,​ ​and​ ​regulators.​ ​The
composition​ ​of​ ​an​ ​SRO’s​ ​board​ ​of​ ​directors,​ ​management,​ ​and​ ​committees​ ​needs​ ​to​ ​strike​ ​a
delicate​ ​balance​ ​between​ ​the​ ​level​ ​of​ ​independence​ ​needed​ ​to​ ​be​ ​a​ ​credible​ ​regulator​ ​and​ ​to
manage​ ​conflicts​ ​of​ ​interest​ ​on​ ​the​ ​one​ ​hand,​ ​and​ ​the​ ​level​ ​of​ ​involvement​ ​that​ ​regulated​ ​firms,
market​ ​operators,​ ​and​ ​supervising​ ​regulators​ ​should​ ​have​ ​to​ ​ensure​ ​the​ ​effectiveness​ ​and
accountability​ ​of​ ​the​ ​SRO​ ​on​ ​the​ ​other.

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Transparency​ ​is​ ​an​ ​important​ ​principle​ ​of​ ​SRO​ ​governance,​ ​which​ ​reflects​ ​SROs’​ ​quasi-public
status​ ​and​ ​responsibilities​ ​to​ ​multiple​ ​stakeholders.​ ​Transparency​ ​in​ ​governance​ ​is​ ​achieved​ ​by
making​ ​public​ ​the​ ​following​ ​types​ ​of​ ​information:
● Publication​ ​of​ ​corporate​ ​governance​ ​policies​ ​and​ ​procedures
● Publication​ ​of​ ​directors’​ ​qualifications
● Publication​ ​of​ ​annual​ ​reports
● Public​ ​notice​ ​and​ ​comment​ ​processes​ ​on​ ​rule​ ​changes
● General​ ​publication​ ​of​ ​rules​ ​and​ ​policy​ ​notices
● Public​ ​reporting​ ​on​ ​the​ ​SRO’s​ ​regulatory​ ​plans​ ​and​ ​performance
● Publication​ ​of​ ​disciplinary​ ​decisions​ ​and​ ​penalties

Conflicts​ ​of​ ​Interest

The​ ​biggest​ ​risk​ ​of​ ​self-regulation​ ​has​ ​always​ ​been​ ​conflicts​ ​of​ ​interest.​ ​Since​ ​conflicts​ ​of
interest​ ​are​ ​inherent​ ​in​ ​the​ ​concept​ ​of​ ​self-regulation,​ ​the​ ​objective​ ​is​ ​not​ ​to​ ​eliminate​ ​all​ ​conflicts
–​ ​rather​ ​it​ ​is​ ​to​ ​ensure​ ​that​ ​potential​ ​conflicts​ ​are​ ​properly​ ​managed,​ ​with​ ​a​ ​view​ ​to​ ​ensuring​ ​that
conflicts​ ​do​ ​not​ ​inappropriately​ ​influence​ ​an​ ​organization’s​ ​policies​ ​and​ ​activities.

The​ ​standards​ ​on​ ​implementing​ ​its​ ​principles​ ​for​ ​self-regulation​ ​state​ ​that:
● the​ ​law​ ​or​ ​regulator​ ​should​ ​ensure​ ​that​ ​potential​ ​conflicts​ ​of​ ​interest​ ​at​ ​an​ ​SRO​ ​should​ ​be
avoided​ ​or​ ​resolved,​ ​and
● an​ ​SRO​ ​should​ ​have​ ​procedures​ ​in​ ​place​ ​to​ ​address​ ​potential​ ​conflicts​ ​of​ ​interest.

Practices​ ​by​ ​SRO​ ​for​ ​Managing​ ​Conflicts

● Ensure​ ​that​ ​market​ ​participants​ ​and​ ​qualified​ ​independent​ ​directors​ ​have​ ​a​ ​meaningful
role​ ​in​ ​its​ ​governance.
● Establish​ ​appropriate​ ​structures,​ ​policies,​ ​and​ ​procedures​ ​to​ ​ensure​ ​that​ ​potential
conflicts​ ​of​ ​interest​ ​between​ ​its​ ​regulatory​ ​and​ ​commercial​ ​or​ ​advocacy​ ​activities​ ​are
appropriately​ ​managed.

Criteria​ ​for​ ​Digital​ ​Asset​ ​Exchanges

Minimum​ ​Criteria​ ​For​ ​Registration​ ​of​ ​Exchanges

● Capital​ ​requirements​ ​/​ ​Insurance
● Board​ ​requirements​ ​-​ ​Advisors​ ​and​ ​Company​ ​Secretary

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Compliance​ ​by​ ​Registered​ ​Exchanges
● KYC​ ​-​ ​tiered​ ​KYC,​ ​after​ ​a​ ​certain​ ​limit,​ ​physical​ ​verification
● AML​ ​-​ ​velocity​ ​based​ ​limits,​ ​STR​ ​reporting,​ ​user​ ​profiling
● AML​ ​software​ ​for​ ​Rs​ ​transactions​ ​(Amlock)​ ​and​ ​bitcoin​ ​transactions​ ​(Chainalysis)
● Maintenance​ ​of​ ​Records
● Compliance​ ​/​ ​Security​ ​Officers

Other
● Import​ ​/​ ​Export​ ​of​ ​cryptocurrencies
● Taxation
● FDI
● Government​ ​Industry​ ​Consultant
● Ponzi​ ​schemes
● ICOs

Capital​ ​Requirement​ ​/​ ​Insurance

Bitcoin​ ​and​ ​cryptocurrency​ ​companies​ ​that​ ​hold​ ​user​ ​funds​ ​face​ ​a​ ​risk​ ​that​ ​in​ ​case​ ​they​ ​become
bad​ ​actors​ ​or​ ​get​ ​hacked​ ​and​ ​lose​ ​user​ ​funds.

A​ ​company​ ​typically​ ​can​ ​hold​ ​both​ ​or​ ​any​ ​one​ ​of​ ​the​ ​following​ ​user​ ​funds:
1) Rs​ ​kept​ ​as​ ​an​ ​advance​ ​for​ ​user​ ​to​ ​buy​ ​bitcoins
2) Cryptocurrencies​ ​kept​ ​as​ ​a​ ​service​ ​provided​ ​to​ ​users​ ​for​ ​convenience

Cryptocurrency​ ​funds​ ​can​ ​be​ ​proved​ ​by​ ​technical​ ​process​ ​like​ ​‘proof​ ​of​ ​reserve’.​ ​Both​ ​of​ ​these
can​ ​be​ ​subject​ ​to​ ​regular​ ​audits​ ​by​ ​certified​ ​agencies.

However​ ​to​ ​protect​ ​users​ ​from​ ​a​ ​bitcoin​ ​or​ ​cryptocurrency​ ​hack,​ ​in​ ​which​ ​the​ ​company​ ​might
lose​ ​part​ ​or​ ​all​ ​of​ ​the​ ​cryptocurrency​ ​balance​ ​of​ ​users,​ ​a​ ​company​ ​might​ ​be​ ​required​ ​to​ ​have​ ​a
minimum​ ​capital​ ​requirement​ ​or​ ​tiered​ ​capital​ ​requirement.​ ​This​ ​also​ ​ensures​ ​that​ ​fly​ ​by​ ​night
operators​ ​do​ ​not​ ​enter​ ​the​ ​market.​ ​The​ ​case​ ​against​ ​this​ ​requirement​ ​is​ ​that​ ​it​ ​hinders
competition.

The​ ​Regulations​ ​may​ ​prescribe​ ​capital​ ​adequacy​ ​requirements​ ​for​ ​cryptocurrency​ ​companies​ ​to
ensure​ ​that​ ​they​ ​have​ ​enough​ ​capital​ ​to​ ​honour​ ​all​ ​their​ ​commitments​ ​to​ ​their​ ​business
associates​ ​as​ ​well​ ​as​ ​their​ ​customers.​ ​A​ ​balanced​ ​capital​ ​adequacy​ ​requirement​ ​would​ ​ensure
that​ ​new​ ​entrants​ ​are​ ​able​ ​to​ ​enter​ ​the​ ​market,​ ​thus​ ​providing​ ​greater​ ​competition,​ ​while​ ​at​ ​the

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same​ ​time​ ​ensuring​ ​that​ ​customers’​ ​interests​ ​are​ ​taken​ ​care​ ​of​ ​and​ ​they​ ​are​ ​not​ ​deceived​ ​by
unscrupulous​ ​enterprises.

The​ ​other​ ​solution​ ​is​ ​that​ ​companies​ ​are​ ​required​ ​to​ ​take​ ​insurance​ ​on​ ​the​ ​cryptocurrency
balance​ ​held​ ​by​ ​the​ ​company.

Both​ ​of​ ​the​ ​above​ ​would​ ​also​ ​have​ ​a​ ​positive​ ​side​ ​effect​ ​that​ ​companies​ ​would​ ​discourage
holding​ ​cryptocurrencies​ ​on​ ​behalf​ ​of​ ​users​ ​and​ ​encourage​ ​educating​ ​users​ ​to​ ​store​ ​it​ ​by
themselves.​ ​This​ ​prevents​ ​centralisation​ ​of​ ​user​ ​funds​ ​and​ ​thereby​ ​possible​ ​hacks​ ​and​ ​shock​ ​to
the​ ​system.​ ​This​ ​also​ ​encourages​ ​companies​ ​to​ ​innovate​ ​to​ ​come​ ​out​ ​with​ ​simpler​ ​solutions​ ​in
which​ ​users​ ​control​ ​their​ ​digital​ ​assets.

KYC
One​ ​common​ ​way​ ​to​ ​reduce​ ​anonymity​ ​of​ ​cryptocurrencies​ ​is​ ​to​ ​link​ ​identity​ ​at​ ​cryptocurrency
exchanges.​ ​Most​ ​exchanges​ ​worldwide​ ​ask​ ​users​ ​to​ ​submit​ ​KYC​ ​documents​ ​and​ ​national
identification​ ​numbers​ ​before​ ​they​ ​are​ ​allowed​ ​to​ ​trade​ ​on​ ​the​ ​exchange.​ ​A​ ​clear​ ​and​ ​evolving
process​ ​of​ ​KYC​ ​for​ ​cryptocurrency​ ​exchanges​ ​should​ ​be​ ​drafted.

Such​ ​a​ ​regulatory​ ​framework​ ​has​ ​an​ ​important​ ​derivative​ ​benefit.​ ​It​ ​not​ ​only​ ​addresses
individual’s​ ​incentive​ ​to​ ​use​ ​cryptocurrencies​ ​for​ ​illicit​ ​purposes,​ ​but​ ​it​ ​potentially​ ​makes​ ​the
cryptocurrency​ ​protocol​ ​as​ ​a​ ​whole​ ​less​ ​appealing​ ​for​ ​illicit​ ​users.​ ​Specifically,​ ​a​ ​unique​ ​feature
of​ ​many​ ​cryptocurrencies’​ ​protocols​ ​is​ ​that​ ​the​ ​anonymity​ ​of​ ​all​ ​users—legitimate​ ​and​ ​illicit—is
interconnected.​ ​As​ ​explained​ ​above,​ ​if​ ​the​ ​owners​ ​of​ ​some​ ​addresses​ ​are​ ​known,​ ​the​ ​public
ledger​ ​can​ ​be​ ​used​ ​to​ ​identify​ ​owners​ ​of​ ​other​ ​addresses.​ ​The​ ​more​ ​addresses​ ​that​ ​are
identified,​ ​the​ ​easier​ ​it​ ​is​ ​to​ ​identify​ ​other​ ​addresses​ ​(if​ ​there​ ​is​ ​a​ ​need​ ​to​ ​do​ ​so).

Thus,​ ​a​ ​regulatory​ ​framework​ ​that​ ​incentivizes​ ​legitimate​ ​users​ ​to​ ​give​ ​up​ ​their
anonymity​ ​will​ ​produce​ ​a​ ​cascade​ ​effect:​ ​the​ ​more​ ​users​ ​that​ ​identify​ ​themselves,​ ​the
less​ ​anonymous​ ​the​ ​entire​ ​system​ ​becomes.

Theoretically,​ ​in​ ​order​ ​for​ ​the​ ​cascade​ ​effect​ ​to​ ​be​ ​meaningful,​ ​some​ ​critical​ ​mass​ ​of​ ​legitimate
users​ ​would​ ​have​ ​to​ ​give​ ​up​ ​their​ ​anonymity​ ​in​ ​order​ ​for​ ​the​ ​system​ ​to​ ​become​ ​non-anonymous
enough​ ​to​ ​deter​ ​illicit​ ​activity.​ ​The​ ​difficulty​ ​here​ ​is​ ​that​ ​the​ ​number​ ​of​ ​wallets​ ​that​ ​users​ ​can
create​ ​is​ ​endless,​ ​and​ ​therefore​ ​additional​ ​legitimate​ ​users​ ​would​ ​have​ ​to​ ​continuously​ ​give​ ​up
their​ ​anonymity.​ ​However,​ ​this​ ​could​ ​be​ ​mitigated​ ​if​ ​the​ ​fact​ ​that​ ​users​ ​voluntarily​ ​give​ ​up​ ​their
anonymity​ ​is​ ​made​ ​salient.​ ​If​ ​illicit​ ​users​ ​were​ ​confronted​ ​with​ ​a​ ​reality​ ​in​ ​which​ ​other​ ​users​ ​give
up​ ​their​ ​anonymity,​ ​then​ ​those​ ​illicit​ ​users​ ​would​ ​never​ ​be​ ​able​ ​to​ ​tell​ ​whether​ ​a​ ​required​ ​critical
mass​ ​of​ ​identified​ ​users​ ​had​ ​been​ ​met.​ ​If​ ​this​ ​fact​ ​were​ ​salient​ ​enough,​ ​illicit​ ​users​ ​should​ ​be

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sufficiently​ ​discouraged​ ​from​ ​using​ ​cryptocurrencies’​ ​protocols.​ ​Under​ ​such​ ​a​ ​framework,
legitimate​ ​users​ ​passively​ ​participate​ ​in​ ​regulatory​ ​efforts​ ​to​ ​prevent​ ​illicit​ ​behavior.

Companies​ ​should​ ​be​ ​mandated​ ​to​ ​follow​ ​a​ ​3​ ​tiered​ ​KYC​ ​procedure​ ​which​ ​would​ ​be​ ​as​ ​follows:

Tier​ ​1​ ​-​ ​Customers​ ​for​ ​whom​ ​No​ ​KYC​ ​is​ ​required
The​ ​Tier​ ​1​ ​customers​ ​shall​ ​only​ ​be​ ​allowed​ ​to​ ​sell​ ​cryptocurrencies​ ​and​ ​hold​ ​fiat​ ​currency
received​ ​from​ ​such​ ​sales.​ ​Such​ ​customers​ ​can​ ​be​ ​allowed​ ​to​ ​buy​ ​cryptocurrencies​ ​only​ ​from​ ​the
fiat​ ​currency​ ​received​ ​from​ ​the​ ​previous​ ​sale​ ​of​ ​cryptocurrencies.​ ​They​ ​shall​ ​not​ ​be​ ​able​ ​to
withdraw​ ​their​ ​fiat​ ​currency​ ​or​ ​transfer​ ​it​ ​to​ ​any​ ​other​ ​account​ ​unless​ ​they​ ​complete​ ​the​ ​KYC
process​ ​for​ ​either​ ​Tier​ ​2​ ​customers​ ​or​ ​Tier​ ​3​ ​customers,​ ​as​ ​applicable.

Tier​ ​2​ ​-​ ​Customers​ ​for​ ​whom​ ​e-KYC​ ​is​ ​required

The​ ​term​ ​e-KYC​ ​used​ ​here​ ​refers​ ​to​ ​receiving​ ​of​ ​various​ ​documents​ ​such​ ​as​ ​PAN​ ​Card,
Address​ ​Proofs,​ ​Bank​ ​Account​ ​Linkage​ ​details​ ​(cancelled​ ​cheque,​ ​etc.)​ ​through​ ​online​ ​images
without​ ​actual​ ​physical​ ​copies​ ​being​ ​sent​ ​to​ ​the​ ​company.​ ​These​ ​documents​ ​shall​ ​also​ ​be
backed​ ​up​ ​by​ ​Adhaar​ ​based​ ​verification​ ​through​ ​AUAs​ ​and​ ​AVAs​ ​designated​ ​by​ ​the​ ​UIDAI​ ​for
the​ ​purpose​ ​of​ ​verification​ ​of​ ​Adhaar​ ​details.​ ​Customers​ ​opting​ ​for​ ​e-KYC​ ​would​ ​have​ ​their
deposits​ ​and​ ​withdrawals​ ​from​ ​their​ ​bank​ ​accounts​ ​limited​ ​to​ ​Rs.​ ​2,00,000/-​ ​per​ ​month​ ​or​ ​Rs.
10,00,000​ ​per​ ​annum.

Even​ ​though​ ​there​ ​is​ ​no​ ​physical​ ​verification​ ​for​ ​Tier-2​ ​customers,​ ​however​ ​scanned​ ​images​ ​of
their​ ​identity​ ​documents​ ​will​ ​be​ ​provided​ ​and​ ​their​ ​trading​ ​accounts​ ​will​ ​only​ ​be​ ​linked​ ​to​ ​an
existing​ ​bank​ ​account​ ​or​ ​payment​ ​gateway​ ​which​ ​they​ ​are​ ​authorised​ ​to​ ​operate.​ ​Therefore​ ​this
facility​ ​will​ ​only​ ​be​ ​available​ ​to​ ​customers​ ​who​ ​already​ ​have​ ​the​ ​ability​ ​to​ ​transfer​ ​funds​ ​from​ ​the
bank​ ​account​ ​or​ ​payment​ ​gateway,​ ​which​ ​would​ ​be​ ​required​ ​to​ ​conduct​ ​their​ ​own​ ​KYC
verifications​ ​as​ ​per​ ​applicable​ ​law.​ ​Further,​ ​the​ ​customers​ ​will​ ​also​ ​undergo​ ​Adhaar​ ​based
verification​ ​through​ ​AUAs​ ​and​ ​AVAs​ ​designated​ ​by​ ​the​ ​UIDAI​ ​for​ ​this​ ​purpose.

Tier​ ​3​ ​–​ ​Customers​ ​for​ ​whom​ ​physical​ ​KYC​ ​is​ ​required
These​ ​customers​ ​would​ ​have​ ​to​ ​physically​ ​send​ ​duly​ ​attested​ ​photocopies​ ​of​ ​their​ ​PAN​ ​Card,
Address​ ​Proofs,​ ​Bank​ ​Account​ ​Linkage​ ​details​ ​(cancelled​ ​cheque,​ ​etc.)​ ​to​ ​our​ ​office​ ​which​ ​will
be​ ​followed​ ​by​ ​a​ ​tele-verification​ ​process​ ​to​ ​ensure​ ​authenticity.​ ​These​ ​customers​ ​may​ ​also​ ​be
asked​ ​to​ ​undertake​ ​Adhaar​ ​based​ ​verification​ ​as​ ​an​ ​added​ ​measure.​ ​There​ ​shall​ ​be​ ​no​ ​limits​ ​to
the​ ​transactions​ ​that​ ​such​ ​customers​ ​can​ ​undertake.

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AML​ ​/​ ​STR
Under​ ​the​ ​provisions​ ​of​ ​the​ ​Prevention​ ​of​ ​Money​ ​Laundering​ ​Act,​ ​2002​ ​and​ ​the​ ​Rules​ ​made
thereunder,​ ​banking​ ​companies,​ ​financial​ ​institutions​ ​and​ ​intermediaries​ ​or​ ​persons​ ​carrying​ ​on
a​ ​designated​ ​business​ ​or​ ​occupation​ ​(together​ ​“reporting​ ​entities”)​ ​are​ ​required​ ​to​ ​send​ ​reports
of​ ​transactions​ ​which​ ​satisfy​ ​certain​ ​criteria​ ​laid​ ​out​ ​under​ ​the​ ​Act​ ​and​ ​the​ ​Rules​ ​and​ ​send​ ​such
reports​ ​to​ ​the​ ​Financial​ ​Intelligence​ ​Unit,​ ​Ministry​ ​of​ ​Finance​ ​in​ ​the​ ​form​ ​of​ ​Cash​ ​Transaction
Reports,​ ​Suspicious​ ​Transaction​ ​Reports,​ ​Counterfeit​ ​Currency​ ​Reports,​ ​Cross​ ​Border​ ​Wire
Transfer​ ​Reports,​ ​etc.​ ​Such​ ​requirements​ ​may​ ​be​ ​made​ ​applicable​ ​to​ ​cryptocurrency​ ​companies
wherever​ ​it​ ​is​ ​appropriate.​ ​This​ ​would​ ​ensure​ ​that​ ​the​ ​enforcement​ ​agencies​ ​are​ ​kept​ ​abreast​ ​of
any​ ​suspicious​ ​activities​ ​that​ ​may​ ​be​ ​occurring​ ​using​ ​the​ ​services​ ​offered​ ​by​ ​cryptocurrency
companies.

Blockchain​ ​Intelligence​ ​Tools

Legitimate​ ​companies​ ​can​ ​use​ ​sophisticated​ ​blockchain​ ​intelligence​ ​tools​ ​to​ ​track​ ​criminal
activity.​ ​These​ ​tools​ ​are​ ​increasingly​ ​available​ ​and​ ​becoming​ ​more​ ​sophisticated.​ ​These​ ​tools
can​ ​help​ ​as​ ​follows.

ACTIVITY​ ​MONITORING​ ​REPORTS

Receive​ ​reports​ ​on​ ​the​ ​blockchain​ ​activity​ ​that​ ​users​ ​are​ ​doing​ ​to​ ​raise​ ​alerts​ ​and​ ​issues​ ​in
quarterly​ ​review​ ​meetings.​ ​The​ ​blockchain​ ​activity​ ​will​ ​be​ ​broken​ ​down​ ​in​ ​different​ ​categories​ ​so
one​ ​can​ ​assess​ ​the​ ​risk​ ​of​ ​doing​ ​business​ ​with​ ​individual​ ​users.

CYBER​ ​THREAT​ ​INTEL

Analysts​ ​can​ ​be​ ​trained​ ​to​ ​be​ ​able​ ​to​ ​spot​ ​emerging​ ​threats​ ​from​ ​the​ ​deep​ ​web​ ​and​ ​investigate
ransomware​ ​or​ ​extortion​ ​notes​ ​in-house.

RISK​ ​SCORE
Real​ ​time​ ​risk​ ​scores​ ​are​ ​available​ ​that​ ​can​ ​determine​ ​the​ ​activity​ ​associated​ ​to​ ​the​ ​source​ ​or
destination​ ​of​ ​Bitcoin​ ​funds​ ​in​ ​real​ ​time.​ ​Types​ ​of​ ​activity​ ​can​ ​be​ ​customized​ ​that​ ​a​ ​company
wishes​ ​to​ ​avoid​ ​and​ ​take​ ​appropriate​ ​action.

QUANTIFY​ ​CYBER​ ​CRIMINAL​ ​REVENUES

Connections​ ​between​ ​victims​ ​can​ ​be​ ​established​ ​and​ ​the​ ​criminal’s​ ​revenues​ ​estimated.

ATTRIBUTION

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Follow​ ​traces​ ​of​ ​Bitcoin​ ​to​ ​find​ ​the​ ​services​ ​that​ ​cyber​ ​criminals​ ​are​ ​using​ ​to​ ​convert​ ​Bitcoin​ ​into
cash​ ​or​ ​other​ ​digital​ ​currencies.

Maintenance​ ​of​ ​Records

Since​ ​cryptocurrency​ ​companies​ ​are​ ​currently​ ​not​ ​regulated,​ ​they​ ​do​ ​not​ ​have​ ​any​ ​legal
guidelines​ ​as​ ​to​ ​how​ ​to​ ​maintain​ ​and​ ​delete​ ​their​ ​records.​ ​In​ ​the​ ​absence​ ​of​ ​any​ ​specific​ ​data
retention​ ​guidelines​ ​some​ ​Bitcoin​ ​companies​ ​are​ ​trying​ ​to​ ​follow​ ​the​ ​guidelines​ ​given​ ​in​ ​Rule
5(4)​ ​of​ ​the​ ​Information​ ​Technology​ ​(Reasonable​ ​security​ ​practices​ ​and​ ​procedures​ ​and
sensitive​ ​personal​ ​data​ ​or​ ​information)​ ​Rules,​ ​2011,​ ​even​ ​though​ ​these​ ​provisions​ ​apply​ ​only​ ​to
“sensitive​ ​personal​ ​data”.​ ​On​ ​the​ ​other​ ​hand,​ ​since​ ​cryptocurrency​ ​companies​ ​are​ ​not​ ​mandated
by​ ​law​ ​to​ ​keep​ ​any​ ​records,​ ​they​ ​may​ ​destroy​ ​records​ ​of​ ​relatively​ ​recent​ ​transactions,​ ​which
may​ ​be​ ​required​ ​for​ ​investigation​ ​purposes​ ​at​ ​a​ ​later​ ​stage.​ ​However,​ ​if​ ​the​ ​data​ ​is​ ​deleted​ ​or
destroyed​ ​in​ ​the​ ​absence​ ​of​ ​any​ ​mandate​ ​to​ ​retain​ ​the​ ​same,​ ​it​ ​would​ ​cause​ ​serious​ ​problems
for​ ​any​ ​investigation​ ​where​ ​such​ ​information​ ​is​ ​needed.​ ​Under​ ​Rule​ ​3​ ​of​ ​the​ ​Prevention​ ​of
Money​ ​Laundering​ ​(Maintenance​ ​of​ ​Records)​ ​Rules,​ ​2005​ ​every​ ​reporting​ ​entity​ ​is​ ​required​ ​to
maintain​ ​certain​ ​kinds​ ​of​ ​records​ ​in​ ​the​ ​manner​ ​and​ ​for​ ​the​ ​period​ ​as​ ​prescribed​ ​in​ ​Rules​ ​4,​ ​5
and​ ​6.​ ​The​ ​requirements​ ​contained​ ​in​ ​the​ ​abovementioned​ ​provisions​ ​or​ ​other​ ​similar
requirements​ ​may​ ​be​ ​made​ ​applicable​ ​to​ ​cryptocurrency​ ​companies​ ​through​ ​regulations.​ ​By
ensuring​ ​that​ ​cryptocurrency​ ​companies​ ​are​ ​regulated​ ​and​ ​have​ ​mandatory​ ​data​ ​retention
requirements,​ ​it​ ​can​ ​be​ ​ensured​ ​that​ ​the​ ​investigating​ ​agencies​ ​can​ ​collect​ ​as​ ​much​ ​information
as​ ​possible​ ​from​ ​them​ ​which​ ​may​ ​give​ ​them​ ​a​ ​huge​ ​advantage​ ​in​ ​their​ ​investigative​ ​efforts.

Import​ ​/​ ​Export​ ​of​ ​Cryptocurrencies

Exchanges
It​ ​is​ ​important​ ​for​ ​Indian​ ​cryptocurrency​ ​exchanges​ ​to​ ​offer​ ​cryptocurrency​ ​rates​ ​to​ ​their
customers​ ​at​ ​international​ ​prices.​ ​They​ ​can​ ​only​ ​do​ ​so​ ​if​ ​they​ ​are​ ​freely​ ​allowed​ ​to​ ​‘import​ ​/
export’,​ ​for​ ​the​ ​lack​ ​of​ ​a​ ​better​ ​word,​ ​cryptocurrencies​ ​from​ ​global​ ​exchanges​ ​to​ ​manage​ ​their
liquidity.​ ​This​ ​means​ ​that​ ​appropriate​ ​regulations​ ​have​ ​to​ ​be​ ​drafted​ ​to​ ​freely​ ​allow​ ​national
exchanges​ ​to​ ​remit​ ​money​ ​to​ ​buy​ ​cryptocurrencies​ ​or​ ​to​ ​receive​ ​payment​ ​for​ ​sale​ ​of
cryptocurrencies​ ​to​ ​global​ ​exchanges.
If​ ​this​ ​is​ ​not​ ​the​ ​case,​ ​Indian​ ​exchanges​ ​will​ ​be​ ​able​ ​to​ ​do​ ​transactions​ ​only​ ​with​ ​customers
locally.​ ​Since​ ​they​ ​will​ ​not​ ​be​ ​able​ ​to​ ​manage​ ​liquidity,​ ​their​ ​prices​ ​will​ ​significantly​ ​differ​ ​from
international​ ​prices.​ ​This​ ​will​ ​force​ ​individual​ ​users​ ​to​ ​take​ ​advantage​ ​of​ ​rate​ ​arbitrage.​ ​Due​ ​to
lack​ ​of​ ​clarity​ ​on​ ​such​ ​transaction,​ ​this​ ​would​ ​be​ ​done​ ​outside​ ​financial​ ​intermediaries​ ​like
banks.​ ​This​ ​would​ ​allow​ ​the​ ​creation​ ​of​ ​such​ ​channels​ ​which​ ​could​ ​expand​ ​potential​ ​illicit​ ​uses.

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By​ ​allowing​ ​legitimate​ ​exchanges​ ​to​ ​manage​ ​liquidity​ ​on​ ​a​ ​global​ ​scale,​ ​the​ ​use​ ​of​ ​financial
intermediaries​ ​to​ ​monitor​ ​the​ ​movement​ ​of​ ​cryptocurrencies​ ​in​ ​and​ ​out​ ​of​ ​the​ ​country​ ​is
encouraged​ ​and​ ​developed.

Remittance
A​ ​clear​ ​regulation​ ​on​ ​allowing​ ​import​ ​of​ ​cryptocurrency​ ​will​ ​help​ ​Indian​ ​cryptocurrency
companies​ ​to​ ​tie​ ​up​ ​with​ ​foreign​ ​companies​ ​and​ ​allow​ ​remittance​ ​services​ ​at​ ​a​ ​fraction​ ​of​ ​the
current​ ​cost.

Just​ ​like​ ​receiving​ ​payments,​ ​cryptocurrencies​ ​can​ ​also​ ​be​ ​used​ ​to​ ​making​ ​payments
internationally.​ ​Already​ ​many​ ​big​ ​merchants​ ​like​ ​Dell​ ​and​ ​Expedia​ ​in​ ​the​ ​US,​ ​Rakuten​ ​Japan’s
biggest​ ​online​ ​company​ ​have​ ​started​ ​accepting​ ​bitcoin​ ​payments.​ ​Airbnb’s​ ​most​ ​requested
feature​ ​in​ ​January​ ​2017​ ​was​ ​to​ ​accept​ ​bitcoins​ ​for​ ​payment
(​https://twitter.com/bchesky/status/814956246864396288​).

A​ ​clear​ ​regulation​ ​on​ ​allowing​ ​to​ ​send​ ​cryptocurrencies​ ​outside​ ​India​ ​will​ ​gradually​ ​encourage
customers​ ​to​ ​use​ ​this​ ​due​ ​to​ ​ease​ ​of​ ​transaction​ ​and​ ​lower​ ​transaction​ ​costs.​ ​This​ ​could​ ​help
save​ ​foreign​ ​exchange​ ​in​ ​a​ ​small​ ​but​ ​growing​ ​base.

Taxation
Cryptocurrency​ ​transactions​ ​are​ ​increasing​ ​worldwide.​ ​It​ ​offers​ ​an​ ​opportunity​ ​for​ ​increased
economic​ ​activity​ ​like​ ​the​ ​Internet.​ ​This​ ​in​ ​turn,​ ​offers​ ​the​ ​opportunity​ ​for​ ​increased​ ​tax
collections.​ ​Cryptocurrency​ ​exchanges​ ​globally​ ​have​ ​already​ ​started​ ​doing​ ​billions​ ​of​ ​dollars
worth​ ​of​ ​transactions.

Value​ ​Added​ ​Tax​ ​/​ ​GST

Most​ ​countries​ ​have​ ​declared​ ​that​ ​when​ ​cryptocurrencies​ ​move​ ​from​ ​person​ ​to​ ​person,​ ​there​ ​is
no​ ​value​ ​added​ ​and​ ​have​ ​made​ ​buying​ ​and​ ​selling​ ​of​ ​cryptocurrencies​ ​VAT-free.​ ​Also
cryptocurrency​ ​companies​ ​should​ ​be​ ​charged​ ​a​ ​service​ ​tax​ ​on​ ​the​ ​services​ ​they​ ​provide.

For​ ​example,​ ​most​ ​exchanges​ ​charge​ ​a​ ​transaction​ ​fee.​ ​There​ ​should​ ​be​ ​regulation​ ​clarifying
that​ ​cryptocurrency​ ​transactions​ ​are​ ​VAT-free​ ​and​ ​service​ ​tax​ ​should​ ​be​ ​payable​ ​on​ ​services
provided​ ​if​ ​they​ ​are​ ​charged​ ​from​ ​customers.

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Income​ ​Tax
Allowing​ ​cryptocurrency​ ​industry​ ​to​ ​develop​ ​can​ ​have​ ​a​ ​significant​ ​opportunity​ ​for​ ​tax
collections.

As​ ​an​ ​asset​ ​class,​ ​the​ ​market​ ​capitalization​ ​of​ ​cryptocurrencies​ ​have​ ​gained​ ​10x​ ​every​ ​year.
Current​ ​market​ ​capitalization​ ​exceeds​ ​$200​ ​billion​ ​(as​ ​on​ ​November​ ​2017).

There​ ​is​ ​a​ ​significant​ ​opportunity​ ​for​ ​short​ ​term​ ​and​ ​long​ ​term​ ​capital​ ​gain​ ​tax​ ​from​ ​users​ ​who
have​ ​made​ ​profits​ ​on​ ​the​ ​sale​ ​of​ ​this​ ​new​ ​asset​ ​class.

The​ ​other​ ​regulatory​ ​issue​ ​is​ ​regarding​ ​income​ ​tax​ ​from​ ​cryptocurrency​ ​transactions.​ ​Income
can​ ​be​ ​derived​ ​in​ ​following​ ​ways:

By​ ​trading​ ​in​ ​cryptocurrencies​ ​as​ ​a​ ​business:​ ​In​ ​this​ ​case,​ ​it​ ​should​ ​be​ ​clarified​ ​that​ ​the​ ​regular
corporate​ ​income​ ​tax​ ​is​ ​payable.

By​ ​trading​ ​in​ ​cryptocurrencies​ ​as​ ​a​ ​non​ ​regular​ ​income:​ ​In​ ​this​ ​case,​ ​it​ ​is​ ​suggested​ ​to​ ​tax
income​ ​as​ ​short​ ​term​ ​and​ ​long​ ​term​ ​capital​ ​gain​ ​tax.

By​ ​using​ ​cryptocurrencies​ ​to​ ​pay​ ​for​ ​goods​ ​and​ ​services​ ​at​ ​a​ ​price​ ​different​ ​than​ ​the​ ​price​ ​at
which​ ​the​ ​cryptocurrency​ ​was​ ​originally​ ​purchased:​ ​Since​ ​taxes​ ​of​ ​a​ ​country​ ​are​ ​in​ ​the​ ​country’s
national​ ​currency,​ ​at​ ​this​ ​moment,​ ​the​ ​only​ ​option​ ​would​ ​be​ ​to​ ​tax​ ​the​ ​income​ ​as​ ​short​ ​term​ ​or
long​ ​term​ ​capital​ ​gain​ ​tax.

To​ ​encourage​ ​the​ ​use​ ​of​ ​cryptocurrencies,​ ​a​ ​minimum​ ​transaction​ ​amount​ ​below​ ​which​ ​users
will​ ​not​ ​be​ ​liable​ ​to​ ​pay​ ​this​ ​can​ ​be​ ​mentioned.​ ​For​ ​example,​ ​merchant​ ​transactions​ ​using
cryptocurrencies​ ​below​ ​Rs​ ​1,00,000​ ​will​ ​not​ ​attract​ ​capital​ ​gain​ ​tax.​ ​This​ ​is​ ​also​ ​important​ ​for
practicality.​ ​For​ ​example,​ ​if​ ​user​ ​buys​ ​coffee​ ​with​ ​bitcoins,​ ​bitcoins​ ​at​ ​this​ ​point​ ​is​ ​more​ ​like​ ​a
currency​ ​instead​ ​of​ ​a​ ​commodity.​ ​He​ ​will​ ​have​ ​to​ ​show​ ​2​ ​transactions​ ​in​ ​his​ ​books.​ ​1)​ ​For​ ​capital
gains​ ​based​ ​on​ ​the​ ​original​ ​price​ ​he​ ​purchased​ ​the​ ​bitcoins.​ ​2)​ ​Capital​ ​gains.​ ​This​ ​will​ ​not​ ​be
practical​ ​for​ ​small​ ​transactions.

FDI
International​ ​VCs​ ​are​ ​making​ ​increasing​ ​global​ ​investments​ ​in​ ​bitcoin​ ​and​ ​digital​ ​asset
exchanges.​ ​There​ ​is​ ​huge​ ​interest​ ​in​ ​India​ ​also.​ ​However,​ ​investments​ ​have​ ​been​ ​negligible​ ​due
to​ ​regulatory​ ​confusion.

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Regulation​ ​and​ ​clarity​ ​will​ ​mean​ ​that​ ​these​ ​companies​ ​can​ ​increase​ ​FDI​ ​in​ ​India​ ​due​ ​to​ ​this
industry.

This​ ​business​ ​will​ ​eventually​ ​develop​ ​like​ ​stock​ ​exchanges​ ​and​ ​commodity​ ​exchanges.​ ​Due​ ​to
its​ ​importance​ ​as​ ​a​ ​potential​ ​infrastructure​ ​entity​ ​and​ ​privacy​ ​of​ ​user​ ​transactions,​ ​FDI​ ​should​ ​be
capped​ ​at​ ​25%.

This​ ​will​ ​help​ ​involvement​ ​of​ ​foreign​ ​entities​ ​and​ ​aid​ ​in​ ​bringing​ ​global​ ​best​ ​practices​ ​and​ ​at​ ​the
same​ ​time​ ​limit​ ​ownership​ ​to​ ​an​ ​Indian​ ​entity.

Government​ ​Industry​ ​Consultation

Bitcoin​ ​and​ ​digital​ ​assets​ ​is​ ​an​ ​industry​ ​which​ ​is​ ​exploding​ ​with​ ​innovation.​ ​This​ ​means​ ​that​ ​it​ ​is
difficult​ ​if​ ​not​ ​impossible​ ​to​ ​keep​ ​pace​ ​with​ ​new​ ​developments​ ​which​ ​could​ ​be​ ​important​ ​from​ ​the
government’s​ ​perspective.

To​ ​keep​ ​abreast​ ​with​ ​developments,​ ​government​ ​industry​ ​consultation​ ​process​ ​can​ ​be
formalized.​ ​A​ ​committee​ ​which​ ​is​ ​represented​ ​by​ ​all​ ​stakeholders​ ​should​ ​meet​ ​periodically.
Public​ ​announcements​ ​can​ ​be​ ​made​ ​which​ ​aids​ ​startups​ ​looking​ ​for​ ​regulatory​ ​clarity​ ​on​ ​various
issues​ ​affecting​ ​the​ ​industry.

Ponzi​ ​Schemes
The​ ​popularity​ ​of​ ​cryptocurrencies​ ​has​ ​attracted​ ​fly​ ​by​ ​night​ ​operators​ ​to​ ​use​ ​this​ ​technology​ ​to
market​ ​traditional​ ​scams​ ​like​ ​ponzis.​ ​Regulation​ ​can​ ​prohibit​ ​allowing​ ​any​ ​cryptocurrency
company​ ​to​ ​advertise​ ​fixed​ ​returns.

ICOs
Blockchain​ ​tokens​ ​like​ ​bitcoin​ ​and​ ​ethereum​ ​have​ ​far​ ​reaching​ ​potential​ ​for​ ​innovation​ ​like​ ​the
Internet.​ ​However,​ ​there​ ​are​ ​many​ ​entities​ ​which​ ​are​ ​launching​ ​tokens​ ​which​ ​would​ ​attract
security​ ​law​ ​under​ ​SEBI.

A​ ​great​ ​document​ ​to​ ​identify​ ​a​ ​decentralized​ ​blockchain​ ​token​ ​from​ ​a​ ​token​ ​which​ ​can​ ​be
identified​ ​as​ ​a​ ​security​ ​has​ ​been​ ​published​ ​by​ ​Coincenter:
https://www.coinbase.com/legal/securities-law-framework.pdf

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They​ ​have​ ​also​ ​published​ ​a​ ​spreadsheet​ ​which​ ​blockchain​ ​developers​ ​can​ ​use​ ​to​ ​check
whether​ ​their​ ​token​ ​would​ ​fall​ ​under​ ​securities​ ​law:
https://docs.google.com/spreadsheets/d/1QxOV2dgxO3C_TyVE0-41ZwLlzPmB-EE1NNshJGue
dCU/edit#gid=0

It​ ​is​ ​critical​ ​to​ ​understand​ ​the​ ​differences​ ​between​ ​these​ ​2​ ​type​ ​of​ ​tokens:
1) Decentralized​ ​tokens​ ​which​ ​power​ ​public,​ ​global​ ​blockchains​ ​like​ ​bitcoin,​ ​ethereum,​ ​etc.
2) Centralized​ ​tokens​ ​which​ ​are​ ​used​ ​by​ ​entities​ ​to​ ​raise​ ​funds​ ​similar​ ​to​ ​a​ ​security.

Once​ ​this​ ​difference​ ​is​ ​understood,​ ​it​ ​is​ ​possible​ ​to​ ​regulate​ ​the​ ​centralized​ ​tokens​ ​mentioned
above​ ​under​ ​existing​ ​securities​ ​law.​ ​And​ ​not​ ​stifle​ ​innovation​ ​or​ ​potential​ ​launches​ ​of​ ​new
decentralized​ ​tokens​ ​like​ ​bitcoin​ ​and​ ​ethereum.

Further​ ​reading:
● Framework​ ​for​ ​Securities​ ​Regulation​ ​of​ ​Cryptocurrencies:
https://coincenter.org/entry/framework-for-securities-regulation-of-cryptocurrencies
● SAFT,​ ​a​ ​reasonable​ ​approach​ ​to​ ​securities​ ​law​ ​when​ ​pre-selling​ ​useful​ ​network​ ​tokens:
https://coincenter.org/entry/the-saft-is-a-reasonable-approach-to-securities-law-when-pre
selling-useful-network-tokens?mc_cid=a7bfc69a19&mc_eid=bdb0a506da

Conclusion
Blockchain​ ​and​ ​cryptocurrencies​ ​are​ ​intimately​ ​linked.​ ​This​ ​is​ ​a​ ​sunrise​ ​industry​ ​like​ ​the​ ​Internet.
Cryptocurrencies​ ​has​ ​the​ ​potential​ ​to​ ​generate​ ​economic​ ​activity​ ​at​ ​an​ ​unprecedented​ ​scale​ ​and
spur​ ​innovation.​ ​It​ ​has​ ​the​ ​potential​ ​to​ ​leapfrog​ ​India’s​ ​financial​ ​infrastructure​ ​like​ ​we​ ​did​ ​with
mobile​ ​phones​ ​and​ ​the​ ​Internet.​ ​Contrary​ ​to​ ​media​ ​reports,​ ​the​ ​technology​ ​provides​ ​greater
transparency​ ​for​ ​law​ ​enforcement​ ​agencies​ ​to​ ​chase​ ​bad​ ​actors.​ ​A​ ​regulatory​ ​framework
specifically​ ​for​ ​this​ ​industry​ ​can​ ​prevent​ ​illicit​ ​uses​ ​of​ ​this​ ​technology​ ​and​ ​user​ ​protection​ ​while
encouraging​ ​legitimate​ ​businesses​ ​to​ ​innovate​ ​and​ ​grow.

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Contact​ ​Us
● Sandeep​ ​Goenka,​ ​Chair,​ ​IAMAI​ ​-​ ​Blockchain​ ​and​ ​Cryptocurrencies​ ​Committee
[email protected]

● Gaurav​ ​Chopra,​ ​IAMAI

[email protected]

● Neha​ ​Bajaj,​ ​IAMAI

[email protected]

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Update​ ​Log
1. 2nd​ ​October​ ​2017
a. Added​ ​section​ ​on​ ​ICOs.
b. Added​ ​recommendation​ ​for​ ​AML​ ​to​ ​mandate​ ​use​ ​of​ ​AML​ ​software​ ​for​ ​Rs​ ​and
cryptocurrency​ ​transactions​ ​like​ ​Amlock​ ​and​ ​Chainlysis.
c. Added​ ​section​ ​on​ ​Opinion​ ​of​ ​Leaders​ ​on​ ​Cryptocurrencies​ ​and​ ​Bitcoin.
d. Added​ ​this​ ​section​ ​-​ ​Update​ ​Log.
e. Added​ ​section​ ​on​ ​Global​ ​Snapshot​ ​of​ ​Industry.
2. 1st​ ​Nov​ ​2017
a. Added​ ​under​ ​ICOs,​ ​a​ ​sub​ ​section​ ​on​ ​‘Further​ ​reading’​ ​with​ ​links​ ​to​ ​reports​ ​from
Coin​ ​Center.
3. 16th​ ​Nov​ ​2017
a. Updated​ ​metrics​ ​in​ ​Business​ ​in​ ​India.
b. Added​ ​paragraph​ ​on​ ​tax​ ​opportunity​ ​on​ ​allowing​ ​this​ ​industry​ ​to​ ​develop.

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