India needs thoughtful digital currency legislation


As 2021 draws to a close, I think back to the dramatic technological changes that the law, lawmakers, courts and lawyers are forced to cope with. Technology has overtaken the law, and lawmakers are challenged by how quickly “we the people” have embraced technological transformations. Constitutional and political challenges abound, regarding what we read, what we see, how we deal with and who knows how we do it all.

Some of these challenges include: Should digital media platforms be regulated like the press or otherwise? Should Over The Top (OTT) streaming services self-censor or be censored? Who is responsible for purchasing and deploying spyware like Pegasus? How to regulate the bias within the artificial intelligence which governs so much of our lives today? What should traditional anti-discrimination law do to deal with algorithm bias?

Lawmakers are probably not required to appreciate science and technology in any field other than cryptocurrency. With 10 crores of cryptocurrency and crypto asset users in India, this ever-expanding market is almost entirely unregulated. The Cryptocurrency and Official Digital Currency Regulation Bill, 2021, which was largely due to be tabled in Parliament during the winter session, has been delayed.

As I wrote in my last column (“Who’s Afraid of Crypto,” IE, December 11), the state’s first foray, in the form of the RBI, was to ban all banking transactions with a person or entity that owned or traded in cryptocurrencies – essentially a death knell for the medium itself. The Supreme Court responded with a nuanced decision that found this ban disproportionate and therefore unconstitutional. While our government is still considering the way forward, let us take a look at the best practices or legislative models that have been adopted. Essentially, countries where cryptocurrencies and crypto-assets are legal have frameworks that impose KYC (Know Your Client), AML (Anti-Money Laundering) mechanisms and require compliance with CFT (Combating Financing of Terrorism) requirements. .

Research firm Triple A tells us that Singapore, where about 10 percent of the population owns cryptocurrencies, has the Payments Services Act, 2020 which has streamlined both traditional cryptocurrencies and cryptocurrencies under. one law. The law also provides a framework for obtaining licenses to operate crypto businesses. Singapore’s philosophy on cryptocurrencies is best explained by Ravi Menon, who heads the Monetary Authority of Singapore (MAS). He explained that the best approach was not to ban, but to put in “strong regulation”. He further added that MAS believes that one of the potential benefits of blockchain technology is that it enables applications where “it was important to know the history of ownership and transfer of value, especially when there was no central trusted party or where dependence on a central party was too costly. “

Similarly, Switzerland has also favored the strong regulatory model supervised by an already established financial regulator. The Federal Financial Market Supervisory Authority (FINMA) which oversees the country’s financial markets requires all providers of virtual asset services, including cryptocurrency exchanges, to be licensed. KYC, AML and CFT procedures must be strictly observed. It is the controls over the use of cryptocurrencies and crypto assets that could
facilitate criminal enterprise.

Now let’s move from small countries like Singapore and Switzerland to a large constitutional democracy like the United States. The United States does not consider cryptocurrency to be legal tender, but defines cryptocurrency exchanges as transmitters of money. The Internal Revenue Service (IRS) treats cryptocurrency as property for US federal tax purposes. Exchanges must obtain the required licenses from the Financial Crimes Enforcement Network and implement the standard AML and CFT requirements that have become the norm in most jurisdictions that regulate cryptocurrencies.

One of the most important lessons to be learned from the United States is the income potential of cryptocurrencies and crypto assets. On August 10, 2020, the US Senate passed a $ 1 trillion bill aimed at improving the country’s infrastructure. To help pay for this, the bill includes a provision to tax cryptocurrency brokers. This will raise nearly $ 28 billion in tax revenue over a decade. This highlights the potential revenue any state, including India, can earn by regulating and taxing cryptocurrencies and those who process them.

As always with regulation and taxation comes responsibility. In September 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued the first sanction against a crypto exchange, naming the SUEX exchange as a “malicious cyber actor”. According to the Treasury Department press release, over 40% of SUEX’s known transactions are associated with illicit actors, including criminal ransomware.
In India, the need for the times is thoughtful legislation and rigorous regulation of the cryptocurrencies and crypto-assets that are already there and in use. If we don’t, or if we come back to considering a ban on these instruments, we will be years behind in this technological leap that has been embraced by other jurisdictions and our own people. It is time for the law to follow now.

There is a lot to think about at the end of the year. Until then, merry Christmas, seasonal greetings and a very happy new year, dear readers. Have a safe and joyful year ahead and don’t forget to continue to mask yourself.

This column first appeared in the print edition on December 25, 2021 under the title “Happy New Year, Teach”. The writer is a senior lawyer practicing law at the Supreme Court

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