Explained | What are SEBI’s concerns around crypto assets? 

The story so far: The Securities and Exchange Board of India (SEBI), the watchdog which regulates the securities and commodities market, has reportedly told the Parliamentary Standing Committee on Finance led by Jayant Sinha that regulation of crypto assets would be difficult given the nature of technology that sustains them. It was reported last month that the Reserve Bank of India had also shared its worries about cryptocurrencies with the committee.

What exactly did the SEBI tell the committee?

SEBI has essentially flagged the problems with regulating crypto assets because they “are maintained in decentralised distributed ledgers, which are nested in computer nodes spread all across the globe.” Crypto assets is usually used as an umbrella term to encompass cryptocurrencies (e.g., Bitcoin, Ether) as also non-currency tokens such as utility tokens (which provide a certain utility within an ecosystem) and non-fungible tokens (which help establish ownership of unique items), among others. The underlying technology for crypto assets is the same — distributed ledgers that aren’t controlled by any one entity.

What else did SEBI say?

As per media reports, SEBI has elaborated upon the possible need for different regulators to deal with different aspects of a crypto asset market. Crypto exchanges, for instance, represent one such aspect. These exchanges, in case of a cross-border transaction, in effect enable the use of a cryptocurrency as a bridge to convert one nation’s official currency to another. These exchanges, SEBI has suggested, could be brought under the regulatory purview of the RBI. The idea is to implement what are called KYC/AML/CFT (Know Your Customer/Anti-Money Laundering/Combating of Financing of Terrorism) norms. For some years now, the RBI has implemented a set of these guidelines in regulating banks so as to prevent them from being used by criminal elements.

The subscribers or customers of crypto assets form another important part of the market. SEBI has suggested that the Consumer Protection Act of 2019 be invoked to make sure their interests are safeguarded. It has also sought clarity on whether cryptocurrencies can be legally classified as securities. Right now, they aren’t. According to media reports, SEBI has said that crypto assets are not part of the definition of what constitutes as securities under the Securities Contracts (Regulation) Act of 1956, also known as SCRA. It is to be noted that what constitutes as securities under the SCRA is what is used under the SEBI Act.

Why is this important?

In December 2021, it was widely reported that the government was looking to get SEBI to regulate crypto assets by bringing in legislation around that time. Though such a legislation — the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 — did not materialise at that time, the talk that the government wants to treat cryptocurrencies as digital assets, rather than as currencies, has not ebbed. Ajay Tyagi, former chairman of SEBI, had in March this year said that the regulator has made several representations to the government regarding cryptocurrency regulation since November last year.

Has SEBI also flagged issues about celebrity endorsements?

Yes. It has proposed to the committee that celebrities should not be allowed to endorse cryptocurrencies. A Hindu BusinessLine report quoted a source who spelt out SEBI’s stance thus: “Given that crypto products are unregulated, prominent public figures including celebrities, sportsment, etc, or their voice shall not be used for endorsement/advertisement of crypto products.” It was also mentioned in that report that they must be held responsible for making any endorsement of crypto products.

What did the RBI tell the committee?

According to a report by PTI, top RBI officials told the committee that cryptocurrencies can lead to “dollarisation” of a part of the economy. This, they said, was against India’s sovereign interest. “Almost all cryptocurrencies are dollar-denominated and issued by foreign private entities, it may eventually lead to dollarisation of a part of our economy which will be against the country’s sovereign interest,” the officials were reported as saying. They linked this to a possible undermining of RBI’s ability to regulate money supply in the economy.

What has been the stance of the government?

Over the last few years, the government’s stance has definitely changed. But there is still ambiguity around what it really wants to do. A Bill that was sought to be introduced last year signalled its intention to ban cryptocurrencies outright. It, however, didn’t see the light of day.

The idea that the administration doesn’t consider cryptocurrencies desirable has been made clear from time to time for some years now. It started as statements in the Budget but then an inter-ministerial report recommended an outright ban. Such currencies were and are considered problematic as they can easily evade official scrutiny, bypass and weaken the monetary system, and fuel illegal trade. Around this time, an RBI circular sought to bar banks from dealing in such currencies, only for the Supreme Court to strike it down.

The cryptocurrency industry saw a window of hope earlier this year when Finance Minister Nirmala Sitharaman imposed a tax for the first time on crypto assets. The tax, at 30%, was seen at first to settle the question of legality of such currencies. But, Ms. Sitharaman, in a TV interview indicated that taxability was an issue that is not to be linked to legitimacy.

Also read | Not in favour of outright Crypto ban: CII chief

Legislative clarity is still awaited. Meanwhile, the Sinha-led committee has in recent months been holding extensive conversations with the financial regulators, who being statutory bodies, report to Parliament. The committee last November also met with representatives of the crypto industry. The Bill aims to set up a facilitative framework for creation of the official digital currency to be issued by the RBI.