India Reverses Stance on Crypto and Plans New Regulatory Regime

  • Uturn for India’s stand on crypto
  • Lobbying by crypto industry forges new rules
  • New crypto rules could come as early as July

Subhash Chandra Garg, Secretary of India’s Department of Economic Affairs (DEA) at the Ministry of Finance, has told reporters this week that draft regulations have been put together for a framework for the use of digital currencies.

Indian authorities have been undecided about the future of cryptocurrencies, and these long-awaited regulations follow the country’s Supreme Court decision to review a petition against the Reserve Bank of India’s (RBI) ban on crypto earlier this year.

In his budget speech in February, Finance Minister Arun Jaitley announced that cryptocurrencies are not legal tender in India and promised that the government would crack down on their use. Since then, the Income Tax Department has issued notices to thousands of crypto investors accusing them of tax evasion. For its part, the RBI ordered all regulated financial institutions to stop all services to businesses and individuals dealing in cryptocurrencies.

Many companies stepped up to challenge the ruling calling it arbitrary, unfair and unconstitutional. Protests by the country’s crypto community have put pressure on the government to reverse their ruling as many believe that the central bank did not provide any reasons for the imposed restrictions.

While in previous comments, Garg said the Indian government “does not read this [cryptocurrency] as currency” and would not allow its use in the country’s payment system, it now recognizes that some people may still find value in cryptocurrencies and will introduce regulations so that crypto transactions are legal and transparent.

Garg also indicated that the new rules would introduce regulation for exchanges in India and implement legal requirements for know your customer (KYC) procedures and record keeping for transactions.

The Supreme Court is scheduled to hear petitions against restrictions imposed on cryptocurrencies by Reserve Bank of India, on July 3 and the new regulatory framework for cryptocurrencies is likely to be presented in the first half of July.

Unregulated Crypto Derivatives Exchanges Dominate Regulated Alternatives

Trading volume on unregulated Bitcoin (BTC) derivatives exchanges is growing rapidly, and continuing to far outpace their regulated-institutional counterparts, according to the most recent (March) CryptoCompare Exchange Review.

unregulated exchange volume(source: CryptoCompare)

Both OKEx and bitFlyer exchanges hosted an average daily derivative trading volume worth well over a billion dollars during March - $1.5 billion and $1.14 billion respectively according to CryptoCompare. It seems then that the older derivative stalwart BitMEX, at $645 million daily average volume, has been rapidly eclipsed by the newer exchanges.

regulated exchange volume(source: CryptoCompare)

Institutional, fiat-dealing (regulated) exchanges hosted a fraction of this volume, the highest being $70.5 million on the CME exchange. CryptoGlobe reported last month the CME’s primary competitor, the CBOE, was shuttering its Bitcoin futures products citing low demand. CME volume spiked last month, but is down this month below to January levels.

However, despite the relatively low average volume, the CME did have one bumper day of record-breaking Bitcoin futures trading volume, trading nearly $550 million worth of bitcoin on April 4th - days after Bitcoin’s unbelievable breakout from its $4,200 resistance.

Outflanked

The ease of onboarding new customers may explain why the unregulated exchanges get more attention.

In a recent interview, BitMEX CEO Arthur Hayes underlined his exchange’s ability to “onboard a [new] customer within 10 minutes,” by accepting Bitcoin and only Bitcoin for funding. In addition, no KYC/AML checks are required to trade on BitMEX, merely an email address; whereas OKEx offers margin trading only after basic KYC/AML checks. These exchanges are registered in Seychelles and Malta, respectively, specifically to avoid such onerous accounting requirements for their customers.

As CryptoGlobe covered early in 2019, however, BitMEX and other derivative exchanges including OKEx officially exclude certain citizens from trading on their platforms due to regulatory concerns, most notably US citizens.

Hayes also intimated at the upcoming launch of an interest bearing Bitcoin-only bond, which he speculated could be used to leverage credit into future Bitcoin-denominated economic activity.