Parliamentary Queries Signal Government's Softening Stance on VDA

Government's Shifting Stance on VDA Evident in Parliamentary Queries

India’s G20 presidency was remarkable in many terms including the fact that the Government of India was firmly clear towards on-boarding the world’s leading economies and building a common consensus towards crypto regulations. 

The Government not only made crypto regulations a priority in its agenda but also discussed ‘IMF-FSB Synthesis Paper-Policies for Crypto Assets,’ to build upon a global crypto regulatory mechanism. The government which traditionally had been vocal about restricting Virtual Digital Assets in the past, has not pivoted its stance, moving towards regulations instead of a blanket ban on emerging blockchain tech. 

The same sentiments are reflected in Parliamentary discussions in which Ministers have replied to queries related to VDA space in their detailed answers instead of shying away from commenting on their legal status. In the report ahead, we discuss the key comments by respective ministers which underline the government’s softening stance on the crypto industry. 

Criminal Misuse of Virtual Digital Assets

Responding to concerns about potential criminal misuse of virtual assets due to their rapid and anonymous nature, the Ministry of Finance has informed the Parliament that ED (Directorate of Enforcement) is actively investigating several cases of cryptocurrency fraud. 

Ministry has officially brought transactions involving virtual digital assets under the ambit of the Prevention of Money Laundering Act, 2002, as per a Gazette notification dated March 7, 2023.

According to the Ministry, these investigations have led to some major actions, including the attachment, seizure, or freezing of proceeds amounting to Rs. 936.89 crores. Additionally, arrests have been made, and prosecution complaints have been filed before the Special Court, PMLA.

The government has informed that in line with recommendations from the Financial Action Task Force (FATF), various countries have adopted diverse approaches towards virtual assets, ranging from regulation to outright bans. 

Government on crypto trading

The government remains cautious about the legality of cryptocurrency trading, as it has not recognized cryptocurrencies as legal tender. According to the official data shared by the Ministry of Finance, an Inter-Ministerial Committee (IMC) is currently examining the matter, comprising representatives from various departments such as MeitY, RBI, SEBI, and CBDT. The IMC aims to develop a regulatory framework for cryptocurrencies but has not provided a specific timeline due to the complexity and absence of a globally acceptable solution.

In terms of public awareness, both the government and the RBI have issued warnings about the risks associated with cryptocurrencies. Various press releases dating back to 2013 caution the public against the financial, operational, and security risks involved in investing in virtual currencies. 

Bitcoin scams

The Indian government acknowledges the presence of Bitcoin and other virtual currencies in the public domain, though it underlines their lack of legal recognition and regulation within the country. In response to growing concerns about fraudulent practices by Bitcoin companies, an Inter-Departmental Committee was formed to assess the current status and recommend potential regulatory frameworks. The committee advised caution against dealing with virtual currencies, citing risks related to money laundering, consumer protection, and tax evasion.

The Reserve Bank of India (RBI) has issued cautionary advice, highlighting the speculative nature of virtual currencies and warning that the central bank has not authorized any entity to operate schemes involving Bitcoin or any other virtual currency. Despite these warnings, specific action has been taken against M/s. ZEB IT Services Private Limited. The Ministry of Corporate Affairs ordered an inspection of the company's books of accounts under section 206(5) of the Companies Act, 2013, specifically to scrutinize its dealings in Bitcoin.

Overall, while the government is actively assessing the complexities surrounding virtual currencies, it maintains a cautious stance due to a lack of universal regulations of the ecosystem. 

Reasons Behind Government’s Apprehensions

Despite proactive actions by the government to build a regulatory framework around cryptocurrencies, some clear apprehensions are visible in the government’s statements. 

• Concerns over potential misuse for illicit activities such as money laundering and terrorism financing.

• Volatility and speculative nature pose risks to retail investors and financial stability.

• The lack of a regulatory framework leads to consumer protection issues and market manipulation.

• Challenges in monitoring and taxing transactions due to the decentralized and pseudonymous nature of cryptocurrencies.

• Potential threat to the stability of the traditional banking system and monetary policy control.

The brighter side of the spectrum

Not everything about the government’s will to regulate the crypto industry brings in negatives as they also open a new side of the spectrum for more stable markets.

• Government engagement signals acknowledgment of crypto's potential, fostering dialogue.

• Active consideration of regulatory frameworks offers clarity to industry stakeholders.

• Enforcement actions against crypto fraud demonstrate commitment to market integrity.

• Alignment with global standards enhances India's position for international collaboration.

Public warnings show crypto's growing relevance in the country.

Also Read: India’s Data Privacy Bill and its Impact on Crypto Industry