How Do Cryptocurrencies Come Into India?

Should cryptocurrencies be banned or regulated? Who should regulate them? How should they be taxed? As interest in cryptocurrencies has surged, the number of questions have also risen. But there is a far more basic question to ask and answer before we get to the others—how do cryptocurrencies actually come into India? The answer to that question will determine how crypto fits into India‘s current and capital account rules and foreign exchange management laws. .While crypto trading interest in India has soared over the past year, there is no clear data on what the crypto holdings within India are. It would be reasonable to assume that, as trading rises, so will the crypto held in India, even if not proportionately..Since India is not a large miner of cryptocurrencies, what route does this crypto take as it finds its way into India?.Conversations with representatives of two large exchanges, who spoke on condition of anonymity, throw up a combination of routes.First, some mining of cryptocurrencies happened in India in the early years between 2012 and 2015. Back then, there was little value to these tokens but they existed within India as an initial pool, said one of these executives. As trading picked up, early adopters managed to trade and grow their pool of bitcoins.That was then. What about now?The first executive believed that the use of the remittance route, where Indian rupees are sent out to buy crypto and bring it onshore exists but is limited. With banks being asked to exercise caution in dealing with cryptocurrencies, most will not allow remittances under the Liberalised Remittance Scheme directly for the purpose of purchasing crypto. Can individuals disguise these purchases via other routes such as one that allows you to send money to relatives or another for studies? Yes.The second executive cited earlier said there are individuals and groups of users who are bringing in cryptocurrencies via the LRS route, despite the scrutiny from banks. Using the 'family' or 'gift' options available under the LRS, money does go offshore for purchase of crypto.How large is this? No one knows.The Reserve Bank of India, in a May circular, had asked banks to ensure that customer due diligence is conducted in line with KYC, money laundering and FEMA rules. An email sent to the RBI seeking more clarity on the issue on Thursday was not answered..There are other ways in which crypto is coming into India.'Airdrops' is one such route. This is when a person residing in India does a project or work which earns them crypto in return for their efforts.Creation of new tokens is another. Indians, residing in India, can mint new tokens and then trade them for more popular cryptocurrencies offshore and then transfer their holdings to a local exchange.In both these instances, no fiat goes offshore but crypto will still come into India. It may come via the exchange route or via hard wallets, which store your crypto.“Indians could access crypto by mining, by staking rewards, which are similar to mining, but slightly different in terms of the participants inputs; via airdrops, which are incentives given to broader users of the network as a reward for their loyalty to the network (think of them as dividends) or via accessing crypto from the secondary markets i.e crypto exchanges,' said Sumit Gupta, chief executive of CoinDCX..The most simple and straightforward way to access crypto across the world are exchanges. While the core Indian crypto community might have accessed crypto from the various sources listed above, the majority of them will continue to gain access via exchanges.Sumit Gupta, CEO, CoinDCX.Understanding the source of cryptocurrencies into India is important to judge risks from money laundering and was an issue taken up by the Joint Parliamentary Committee which met last month.The issue also found mention in a report by policy think tank Observer Research Foundation, which noted that determining the source of crypto is important to assess the applicability of the Foreign Exchange Management Act..It is not clear if a crypto exchange is sourcing crypto assets from Indian miners using Indian currency or from miners based abroad. Even for the purpose of taxation, it is important to identify place of supply.ORF Report On Cryptocurrencies.Crypto assets are 'digitally native assets' and can be used to find ways around foreign exchange control laws of nations like India, where full capital account convertibility isn't available, said Mandar Kagade, founder of Black Dot Public Policy Advisors. As such, the question around the source of cryptocurrencies deserves policy attention. According to Kagade, firstly FEMA and suspicious transaction reporting rules must apply to crypto exchanges and service providers. As for cash-to-crypto and crypto-to-crypto transactions by individuals, there is tension between the need to encourage innovation and national / financial integrity. 'Low thresholds for reporting triggers, supervisory technologies that detect suspicious movement and velocity, along with international co-ordination are the ways to ensure the system can stay lockstep.'.According to R Gandhi, former deputy governor at the Reserve Bank of India, there is a favourable and unfavourable way to look at the issue, since regulation around cryptocurrencies has not been defined.If you take a favourable view, cryptocurrencies can be seen as a exchange traded listed instruments, which are permitted under FEMA, within the overall limit of $250,000 per person per year, said Gandhi, adding that these transactions should be seen as part of the capital account.If you take an unfavourable view, you can argue that unless explicitly permitted, outflows under the LRS route cannot be used for crypto purchases.In cases where Indian rupees haven't gone offshore but a person holds these assets offshore, a different principle applies. As per FEMA rules, you can hold these assets offshore with permission. However, if you bring it into India, income tax-related or customs-related provisions may apply.The ORF paper said that purchase of cryptocurrencies from the overseas market should be seen as current account transactions, akin to trade in a commodity. 'Since it is possible to categorise crypto as a commodity, its purchase and sale between persons resident in and outside India can be categorised as “foreign trade', the paper said. But even by that argument, FEMA rules will apply. Drawing a parallel to gold imports, the paper said gold can only be imported through payment via fiat. A similar rule may apply to cryptocurrencies. Capital flight is possible only with the intersection of fiat and crypto, said Gupta of CoinDCX. “All such interactions can be closely monitored, governed and restricted if violating laws, via well thought out regulations.”.We believe pure crypto asset interactions like airdrops and staking rewards are the basic building blocks of Web 3.0 and theoretically, cannot account for capital account transactions without interactions with fiat currencies.Sumit Gupta, CEO, CoinDCX.The issue has been debated globally as well.In a paper discussing supervisory concerns around crypto assets, the Bank of International Settlement said the so-called travel rule for wire transfers should apply to crypto assets as well. This requires that crypto service providers must obtain and hold accurate information on the originator and beneficiary of a transfer. This must be then submitted to the next financial intermediary in the transaction. 'While this is a part of the FATF (Financial Action Task Force) recommendations, several surveyed jurisdictions have not implemented this requirement,' the BIS said in a paper in April 2021.In the case of peer-to-peer transfer, the BIS said new approaches may need to be developed..There is an opportunity to adopt new approaches that take advantage of the inherently data-rich nature of the cryptoasset sector.BIS Paper - Supervising Cryptoassets For Money Laundering (April 2021).A second implication of the route that crypto takes into India is that the RBI, which has cautioned against the risks around cryptocurrencies, will continue to play a role.In November, Bloomberg reported that the government is considering asking the Securities and Exchange Board of India to regulate these tokens on the premise that they are more like assets than currencies.Gandhi says this view does not take into account issues related to the capital account. The RBI will always play a role when capital account and FEMA-related issues come into play. Kagade shares that view. .The asset, as the FATF definition indicates, is sui generis. We have to therefore lose traditional notions of siloed regulations.Mandar Kagade, Founder, Black Dot Public Policy Advisors.Kagade added that, in India's case, SEBI, RBI, the Financial Intelligence Unit, the Enforcement Directorate may need to come together eventually for oversight of crypto assets. 'We also need supra-reg bodies like the Financial Stability and Development Council to play a role.'.Cryptocurrency Taxation: Capital Gains, Business Income, GST?

How Do Cryptocurrencies Come Into India?

How do cryptocurrencies come into India? The answer will determine how it is treated under foreign exchange management laws.

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