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

Why did the market watchdog say it was difficult to regulate these currencies? Where is the invoice?

Why did the market watchdog say it was difficult to regulate these currencies? Where is the invoice?

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

What exactly did SEBI tell the committee?

Essentially, SEBI pointed to regulatory issues with crypto assets, as they “are kept in decentralized distributed ledgers, which are nested in computing nodes distributed around the world.” Crypto-assets are generally used as an umbrella term to encompass cryptocurrencies (e.g. Bitcoin, Ether) as well as non-monetary tokens such as utility tokens (which provide some utility in an ecosystem) and non-fungible tokens (which help establish ownership of unique pieces), among others. The underlying technology of crypto-assets is the same: distributed ledgers that are not controlled by any entity.

What else did SEBI say?

According to media reports, SEBI elaborated on the possible need for different regulators to deal with different aspects of a crypto asset market. Crypto exchanges, for example, are one such aspect. These exchanges, in the case of a cross-border transaction, in effect make it possible to use a cryptocurrency as a gateway to convert the official currency of one nation to another. These exchanges, SEBI suggested, could be brought under the regulatory control of the RBI. The idea is to put in place what are called KYC/AML/CFT (Know Your Customer/Anti-Money Laundering/Combating of Financing of Terrorism) standards. For some years, the RBI has implemented a set of these guidelines in the regulation of banks to prevent them from being used by criminal elements.

Another important part of the market are subscribers or customers of crypto assets. SEBI suggested that the Consumer Protection Act 2019 be invoked to ensure their interests are protected. He also investigated whether cryptocurrencies can be legally classified as securities. Right now they are not. According to media reports, SEBI said crypto assets are not part of the definition of what constitutes securities under the Securities Contracts (Regulation) Act of 1956, also known as SCRA. It should be noted that what constitutes 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 seeking to get SEBI to regulate crypto assets by passing legislation at that time. Although such legislation – the Cryptocurrency and Official Digital Currency Regulation Bill, 2021 – has not materialized at this time, the rhetoric that the government wants to deal with cryptocurrencies as digital assets, rather than currencies, has not diminished. Ajay Tyagi, former chairman of SEBI, had said in March this year that the regulator had made several representations to the government regarding the regulation of cryptocurrencies since November last year.

Has SEBI also reported issues with celebrity endorsements?

Yes. He proposed to the committee that celebrities should not be allowed to endorse cryptocurrencies. A Hindu BusinessLine The report quoted a source as explaining SEBI’s position thus: “Since crypto products are unregulated, prominent public figures, including celebrities, sportsmen, etc., or their voices should not be used to endorsement/advertisement of crypto products.” It was also mentioned in this report that they should be held accountable for any endorsements of crypto products.

What did the RBI tell the committee?

According to a report by PTI, senior RBI officials told the committee that cryptocurrencies can lead to the “dollarization” of part of the economy. This, they said, was against India’s sovereign interest. “Almost all cryptocurrencies are denominated in dollars and issued by foreign private entities, this could eventually lead to the dollarization of part of our economy, which would be contrary to the sovereign interest of the country,” said the responsible. They linked this to possible damage to RBI’s ability to regulate the money supply in the economy.

What was the government’s position?

In recent years, the government’s position has definitely changed. But there is still ambiguity around what he really wants to do. A bill that was due to be introduced last year signaled its intention to ban cryptocurrencies outright. However, it did not see the light of day.

The idea that the administration does not consider cryptocurrencies desirable has cropped up on and off for a few years now. It started with statements in the budget, but then an interdepartmental report recommended an outright ban. These currencies were and are considered problematic because they can easily escape official scrutiny, circumvent and weaken the monetary system, and fuel illegal trade. At that time, an RBI circular sought to ban banks from trading these currencies, only to have the Supreme Court strike it down.

The cryptocurrency industry saw a window of hope earlier this year when Finance Minister Nirmala Sitharaman imposed a tax on crypto assets for the first time. The tax, at 30%, was first perceived as settling the question of the legality of these currencies. But, Ms. Sitharaman, in a television interview, indicated that taxation was an issue that should not be linked to legitimacy.

Read also | Not in favor of an outright ban on Crypto: CII chief

Legislative clarity is still expected. Meanwhile, the Sinha-led committee has had extensive conversations in recent months with financial regulators, who being statutory bodies report to parliament. Last November, the committee also met with representatives from the crypto industry. The bill seeks to put in place a facilitating framework for the creation of the official digital currency to be issued by the RBI.

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