India: the Biggest Crypto Market Enables New Regulations Soon

This July, India was the center of crypto media attention. This is due to two reasons: the WazirX $230 million hack and new movements in the local crypto regulation landscape. But the basic thesis of why India is important for the global crypto landscape is much simpler. With more than 1.4 billion citizens, India is the country with the biggest population, where crypto regulation and rules for VASPs already exist.

There are different numbers describing the number of crypto users in India. KuCoin estimates the number of crypto users in the country at 115 million in 2022 and Tripple A at 97.5 million. Unlike China, India has crypto regulations, which makes crypto exchange legal in the country. Announced upgrades of local regulations may influence the global crypto industry.

WazirX hack

Unauthorized criminals hacked the multisig wallet belonging to the biggest local exchange, WazirX, on July 18th. The stolen $230 million amounted to approximately 45% of WazirX's reserves. $100 million of it was in Shiba Inu, and $52 mln was in Ethereum. Short notice about the hack was published in the company’s blog.

This demonstrates a lack of security in WazirX's tech infrastructure or its crypto custody provider, Liminal. Both sides were quick to blame each other, which seems strange, considering WazirX is the most well-known crypto exchange in India.

This occasion also proves that local crypto regulations need to be developed. For instance, in South Korea, such a hack will be impossible - based on local legislation crypto exchanges should store their funds not multisig, but cold wallets. As for the hack itself, it has been linked to hackers from North Korea, according to Elliptic’s investigation.

Regulation Updates

Bharat Web3 Association (BWA) proposed an initiative to reduce TDS tax from 1% to 0,01%. Despite that this month the Indian government has remained TDS unchanged. This came to light after the publication of the budget with the new composition of the Narendra Modi government.

Also this month Economic Affairs Secretary Ajay Seth announced new crypto regulation guidelines.  Based on his speech cryptocurrencies in India are “regulated from the perspective of AML alone”. The secretary claims that “it cannot be beyond that” and the new “policy stance will come out in the discussion paper”. According to his assumption the final document will be published in September. Co-founder of another local crypto exchange CoinDCX Sumit Gupta has appreciated this initiative and сalled the government to work together on the topic.

Current Regulation Approach

According to local AML/CFT rules crypto entities need to register as Virtual Digital Asset Providers (VDA). Based on press release issued by Finance Ministry 28 entities were registered as VDA providers in the end of 2023 by the local Financial Intelligence Unit. These companies include Binance, Coin DCX, WazirX (Zanmai Labs), Coinswitch and Zebpay.

Also the country has taxation procedures for crypto gains - CGT tax (30%) and TDS (1%) for every transaction regardless of its economic profit (or loss). If we talk about the other regulators, the RBI (Indian Central Bank) has probably the most damaging approach towards crypto and marks them as a threat to financial stability. At the same time, the SEBI (local SEC) is also implementing a number of initiatives to legalize crypto trading in the country.

What can change?

It looks like current issues of crypto regulations in India such as high taxation and WazirX hack, may be compared to the state of crypto regulations in Japan and South Korea several years ago. These countries also had a series of hacks that forced regulators to tighten their approach to funds storage. Also, Japan had a high taxation for crypto entities and individuals, but now it's changing its regulation approach. As I think development of crypto regulations in India may go by the same scenario like in Japan in the field of taxation and customer security.

Although India has regulations for crypto exchange, it doesn't have clear regulations for some other type of VASPs including investment activity and crypto derivatives (such as ETFs). May be next year operations with crypto for investment companies will be included in the new crypto regulation framework. This is quite possible based on the current SEBI's approach.

Also, no crypto cards are currently issued in India. Based on the RBI's current position, crypto cards may be referred as a threat to financial stability, because they allow crypto payments. It's different in the US and European Union. Crypto card issuers can operate there, and this market is transparent for regulators, business, and customers.

Legalizing crypto cards and ETFs in India may take more time than next year. However, in the medium term (next year), the country will likely adopt proper guidelines and licensing procedures for exchanges, custodians, and crypto funds.

Conclusion

India is now almost as big in crypto as China and one of the fastest growing economies on the planet. So, we will continue to watch closely how the rules for crypto business are changing there. Despite the existing challenges, this jurisdiction has great potential.

If you are interested in getting more crypto regulation insights, you can watch the global crypto regulation ratinghere and get updates on my Telegram channel.