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UNDERSTANDING SEBI’s PROPOSAL
In a significant move for the future of cryptocurrency in India, the Securities and Exchange Board of India (“SEBI”) has proposed a multi-regulatory framework for overseeing cryptocurrency trading. This proposal, detailed in documents submitted to a government panel, marks the most open stance yet from an Indian authority towards private virtual assets. However, it contrasts sharply with the Reserve Bank of India’s (RBI) persistent calls for stringent restrictions, highlighting a deepening regulatory divide.
SEBI suggested that it could oversee cryptocurrencies that function as securities and Initial Coin Offerings (“ICOs”). The RBI would regulate assets backed by fiat currencies, such as stablecoins, while the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA) could supervise insurance and pension-related virtual assets, respectively.
Understanding an ICO
An ICO is the cryptocurrency industry’s equivalent of an initial public offering (IPO). A company seeking to raise funds for a new coin, app, or service can launch an ICO. Interested investors can purchase a new cryptocurrency token issued by the company, which may have some utility related to the product or service or represent a stake in the company or project.
KEY COMPONENTS OF THE PROPOSAL
- Classification Framework:SEBI proposes categorizing cryptocurrencies into distinct segments based on their nature, utility, and underlying technology. This classification would enable tailored regulatory measures for different types of digital assets, such as utility tokens, security tokens, and decentralized cryptocurrencies like Bitcoin and Ethereum.
- Registration Requirements:Under the proposed framework, cryptocurrency issuers, exchanges, and other intermediaries would be required to register with SEBI. This registration process would involve stringent due diligence checks to assess the credibility, security measures, and compliance standards of these entities.
- Market Surveillance Mechanisms:SEBI emphasizes the importance of robust market surveillance mechanisms to detect and prevent market manipulation, insider trading, and other illicit activities in the cryptocurrency space. The regulator intends to leverage advanced technologies such as blockchain analytics and artificial intelligence to enhance its surveillance capabilities.
- Investor Protection Measures:Recognizing the inherent risks associated with investing in cryptocurrencies, SEBI proposes stringent disclosure norms, risk warnings, and investor education initiatives to safeguard the interests of retail investors. Additionally, the regulator may prescribe limits on retail investor participation in high-risk cryptocurrency products and derivatives.
- Enforcement Framework: SEBI underscores the need for a strong enforcement framework to ensure regulatory compliance and address violations effectively. This includes imposing penalties, initiating legal proceedings, and collaborating with law enforcement agencies to curb illicit activities in the cryptocurrency market.
Fiscal Policy Risks
The RBI has raised concerns that cryptocurrencies could lead to tax evasion and that decentralized peer-to-peer (P2P) activities in cryptocurrencies would rely on voluntary compliance, both posing risks to fiscal stability. Additionally, cryptocurrencies might result in a loss of “seigniorage” income, the profit earned by a central bank from money creation.
The RBI’s 2018 ban on cryptocurrency transactions through banking channels, although overturned by the Supreme Court in 2020, reflects persistent apprehensions about the integration of such assets into the formal financial system. The central bank’s resistance is further underscored by its recent push for a prohibition on stablecoins, which are designed to offer stability by being pegged to fiat currencies. The government also required all exchanges to register locally before facilitating crypto transactions within the country.
CHALLENGES AND ROAD AHEAD
While SEBI’s proposal marks a significant step towards regulating cryptocurrencies in India, it also faces several challenges and uncertainties. The evolving nature of the cryptocurrency landscape, technological complexities, and international regulatory developments pose challenges in formulating and implementing effective oversight measures.
Moreover, the coexistence of multiple regulatory authorities, including the RBI and the Ministry of Finance, adds another layer of complexity to the regulatory framework. Coordination among these stakeholders will be crucial to ensure coherence and effectiveness in regulating cryptocurrencies.
KEY TAKEAWAYS
- SEBI advocates for crypto oversight to be divided among various regulatory bodies based on the nature of the digital asset.
- This approach contrasts with the RBI’s more conservative stance, which continues to view cryptocurrencies, particularly stablecoins, as a macroeconomic risk.
- SEBI is open to overseeing digital assets that resemble securities and proposes regulating ICOs and other equity market-related products.
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