How to set up Crypto exchange in India?

A crypto currency exchange is a trading platform where users may buy, sell, and swap a variety of crypto assets. The best revenue-generating business concept in the digital world is a crypto currency exchange. A crypto exchange is a platform for buying and selling crypto currencies. In addition to trading services, crypto exchanges also offer price discovery through trading activity as well as storage for crypto. Before crypto exchanges, people were only able to acquire crypto through mining or by organising transactions in various online and offline forums. Today, there are many crypto exchanges offering an array of digital assets with varying levels of security and associated fees.

Legal Requirements

There is no specific law, regulation, or licencing requirement that is applicable to the crypto exchanges operating in India. Depending on the form of entity, the crypto exchanges would be required to obtain customary approvals from the authorities for doing business in India. If a crypto exchange is operating in the form of a company, then it shall have to adhere to the necessary provisions of the Companies Act, 2013, and its underlying rules.

Crypto exchange inter-alia would also have to obtain tax-related approvals and registrations from relevant tax authorities. The exchange would have to obtain:

• Permanent Account Number (PAN),
• Tax Deduction and Collection Account Number (TAN), and
• Goods and Services Identification Account Number (GSTIN)

The company would need to carry out necessary compliances applicable under the tax law, such as the filing of income tax returns, the monthly deposition of withholding tax, the filing of quarterly withholding tax returns, withholding tax certificates, the filing of monthly and annual goods and services tax returns, etc.

The income tax has already been proposed to be imposed on crypto transactions in India by the Finance Bill, 2022, and the GST Council is also working on the imposition of GST on commissions or transaction charges earned by crypto exchanges. As regards the companies Act, 2013, every company transacting or dealing in crypto currencies is required to make disclosure of profits or losses derived from crypto currencies separately in its financial statements. Thus, the situation is clear to some extent, and the government is seriously making efforts to regulate crypto currencies, though they have not been legalised yet.

As far as reporting for crypto exchanges is concerned, the Ministry of Corporate Affairs (the authority for regulating companies in India) made it mandatory, via a notification dated March 24, 2021, for companies dealing with crypto currencies to disclose profit or loss incurred on transactions, the amount of crypto currency they hold, and deposits or advances from any person. Therefore, the crypto exchanges are required to clearly disclose profit or loss and other details in the financial statements with regards to the crypto transactions.

Steps for incorporation

Step 1: Digital Signature Certificate (DSC): As the registration process of the company is completely online, digital signatures are required to file the forms on the Ministry of Corporate Affairs (“MCA”) portal. DSC is mandatory for all the proposed directors and the subscribers to the Memorandum of Association (MoA) and Articles of Association (AoA).

Step 2: Director Identification Number (DIN): The Director Identification Number (DIN) is an identification number for a director, and it has to be obtained by anyone who wants to be a director in a company. The DINs of all the proposed directors of the company, along with their names and address proof, are to be provided in the company registration form. DIN can be obtained while filing the SPICe+ form, i.e., the company registration form.

Step 3: Registration on the MCA Portal: To apply for company registration, the SPICe+ form is to be filled out and submitted on the MCA portal. To fill out the SPICe+ form and submit documents, the director of the company has to register on the MCA portal. After registration, the director can log in and obtain access to the MCA portal services, which include filing e-forms and viewing public documents. After the approval of the name filed in Part-A of the SPICe+ form, it will be reserved for a period of 20 days within which the company must fill out Part-B of the SPICe+ form and submit the form online. The applicant must provide the details of the company and directors in Part-B of the SPICe+ form, attach documents, attach the DSC, check the form, and submit it.

Step 4: Certificate of Incorporation: Once the registration application is filled out and submitted along with the required documents, the Registrar of Companies will examine the application. Upon verification of the application, he will issue the Certificate of Incorporation for the company. The Certificate of Incorporation is issued with PAN and TAN as allotted by the Income Tax Department. An electronic mail with a Certificate of Incorporation as an attachment along with PAN and TAN will also be sent to the applicant.

Cryptocurrency Bill, 2021: A way forward

The bill seeks “to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India.” The bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

The crypto currency exchanges may have to seek licenses from a designated regulator (like SEBI) to conduct business like the equity and commodity trading platforms once the Crypto currency and Regulation of Official Digital Currency Bill, 2021 is passed, a few reports suggest.

Crypto platforms might have to fulfil a host of eligibility criteria, including meeting minimum net worth and governance guidelines, before being granted a licence to conduct business in India. The regulator may direct the crypto platforms to follow KYC (know your customer) norms and disclosure requirements.