Fiat currency transactions
What rules and restrictions govern the exchange of fiat currency and cryptoassets?
At present, no rules or restrictions govern the exchange of fiat currency and cryptoassets. However, if the proposed legislation tabled before Parliament is enacted in its current form, this exchange would be prohibited and could attract penalties or imprisonment or both as prescribed thereunder.
Exchanges and secondary markets
Where are investors allowed to trade cryptoassets? How are exchanges, alternative trading systems and secondary markets for cryptoassets regulated?
In the absence of an exchange of fiat currency, investors can execute pure cryptoasset trades. Based on the proposed legislation tabled before Parliament, a cryptoasset exchange executing a pure cryptoasset trade could also result in penalties given that a ban has been proposed on any dealing of cryptoassets, including via an exchange.
How are cryptoasset custodians regulated?
At present, cryptoasset custodians are unregulated in India, although their operations could be deemed illegal once the Cryptocurrency Bill 2019 is enacted in its current form.
How are cryptoasset broker-dealers regulated?
While cryptoasset broker-dealers are not regulated at present, their operations could be deemed illegal once the Cryptocurrency Bill 2019 is enacted in its current form.
What is the legal status of decentralised cryptoasset exchanges?
At present, cryptoasset exchanges (centralised or decentralised) remain unregulated and this may affect the trade of cryptoassets for cryptoassets. However, on the enactment of the Cryptocurrency Bill 2019, this exchange could be deemed to be illegal and prohibited from affecting any cryptoasset trade.
What is the legal status of peer-to-peer (person-to-person) transfers of cryptoassets?
A parallel is often drawn between cryptocurrency and prepaid instruments that facilitate the exchange of funds between peers. This activity is regulated under the Payment and Settlement Act 2007 and the Reserve Bank of India (RBI) Master Directions on Issuance and Operations of Prepaid Payment Instruments of 11 October 2017. However, prepaid instruments have intrinsic value and are ‘loaded or reloaded with cash’, unlike cryptocurrencies, which cannot have any intrinsic value per se, but their value is contingent on their demand and supply. Because cryptocurrencies do not fall under the above legislation, a peer-to-peer transfer of cryptoassets would arguably be permitted. However, this transfer could potentially be deemed illegal given that Cryptocurrency Bill 2019 seeks to prohibit the transfer of cryptoassets.
Trading with anonymous parties
Does the law permit trading cryptoassets with anonymous parties?
The trading of cryptoassets, irrespective of whether such party is identified or anonymous, may be potentially illegal, given the provisions of the Cryptocurrency Bill 2019. In light of cryptoassets being commonly viewed as a front to conduct suspicious transactions, a cryptoasset trade with anonymous parties, if falling under the radar of the Financial Intelligence Unit set up under Financial Action Task Force, could attract penal consequences.
Are foreign cryptocurrency exchanges subject to your jurisdiction’s laws and regulations governing cryptoasset exchanges?
At present, foreign cryptocurrency exchanges facilitating cryptocurrency-to-cryptocurrency trades are not subject to laws or regulations in India.
Under what circumstances may a citizen of your jurisdiction lawfully exchange cryptoassets on a foreign exchange?
At present, an Indian citizen can lawfully exchange cryptoassets for other cryptoassets on a foreign exchange only if it does not involve the exchange of fiat currency in light of prevailing foreign exchange norms that permit only cross-border remittances of permissible activities. Further, while the RBI Circular has been set aside by the Supreme Court, the lack of a clear directive from the RBI may also pose practical challenges in the remittance of fiat currency.
Do any tax liabilities arise in the exchange of cryptoassets (for both other cryptoassets and fiat currencies)?
Despite the Indian tax authorities being proactive in initiating action against businesses involved in the exchange of cryptoassets for other cryptoassets or fiat currencies, the basis for such action must be established. Since the finance…