India’s crypto regulatory scene has been muddy for years now. Since last year, the government has sent mixed signals about its intentions regarding cryptocurrency regulation. While the finance minister Nirmala Sitharaman has said from time to time that there will be a window of opportunity for crypto businesses and experiments, reports of a blanket ban have surfaced now and again, to the confusion of all. 

On the other hand, the Reserve Bank of India, the country’s central bank, has been consistent in its stance against crypto. After the submission of a 2021 inter-ministerial committee’s report on cryptocurrencies, which recommended a ban along the lines of the draft crypto bill of 2019, the current draft of the crypto bill now awaits a nod from the Union Cabinet before it can be listed on the parliamentary agenda for the next session. 

But the gray cloud of confusion seems to be lifting from the Indian crypto regulatory space, as crypto exchange WazirX has confirmed that the 2021 draft crypto bill seeks to classify cryptocurrencies as commodities. According to a report by the Economic Times, virtual currencies will be treated as commodities for all purposes including taxation, payments, investments or utility.

According to the ET report, the government will focus on the end-usage of the asset for regulation, and the bill is expected to outline the details of taxation of crypto assets for them to be clearly categorized. The government first needs to categorize cryptocurrencies to determine how they can be regulated and taxed. 

In a written statement, Nischal Shetty, CEO of WazirX, said: “Categorizing crypto is critical to having the right crypto regulations in India. Crypto is primarily categorized into four major categories globally — asset, utility, currency and security.”

Sathvik Vishwanath, CEO and co-founder of cryptocurrency exchange Unocoin, told Forkast.News: “For a country like India, I strongly believe that it [classifying crypto as assets] makes the most amount of sense because within the country we already have a very strong financial system … Indians will be able to get the benefit of the utility that cryptocurrencies bring to the table,” although defining it as commodities means pushing the benefits of using cryptocurrencies for payments  “into the gray zone.” 

It comes as no surprise, though, that the government is not looking to recognize crypto assets as currencies, much less consider making one of them legal tender like El Salvador. The RBI has reiterated that virtual currencies have no intrinsic value and can never act as currencies. 

Shetty said: “This step is very positive for the crypto industry and I’m glad that the government is taking this direction towards crypto regulation.”

The ET report further states that only digital assets that fall within the government’s definition of cryptocurrencies will be allowed to be traded in exchanges. 

Shetty said that regulating crypto “will bring more clarity for the entire industry. It will push more entrepreneurs to start in this sector. It will reduce the fear of venture capital investors wanting to invest in the crypto industry in India. For retail investors and traders, this will again boost their confidence and bring a sense of stability. The current regulatory uncertainty is not helping anyone. We look forward to this positive direction from the government.” 

Sumit Gupta, CEO and co-founder of CoinDCX, told Forkast.News the move will help Indians to learn and understand the value of digital assets and foster greater financial inclusion for the country’s sizable underbanked population. He also sees crypto regulation as a step in the right direction.

“Greater regulatory clarity can be seen as a positive for investors, in that it enables safer and better-defined investment parameters while giving legitimacy to the space,” Gupta said. “It also has the potential to strengthen India’s status as a rising hub for crypto assets, spurring further capital inflows and innovation in the space.”

Increased oversight for investors, Gupta added, particularly for tax reporting, will help to deter issues such as money laundering and terrorism financing, which has long plagued the industry.

End of the banking drought?

In 2018, when the RBI published a circular prohibiting banks from dealing with cryptocurrency-related businesses, a banking drought ensued. In March last year, the Supreme Court struck down the circular, saying that it was “disproportionate” with the RBI’s consistent stance that virtual currencies are not prohibited in the country. After the apex court judgment, banks had started resuming services to crypto businesses late last year.

However, HDFC Bank and State Bank of India Cards & Payment Services sent emails to customers in late May citing the outdated RBI circular and demanding clarifications for cryptocurrency-related transactions. The emails even threatened account suspension or closure if customers failed to adhere to it. ICICI Bank, on the other hand, had stopped providing services to cryptocurrency businesses earlier in May and had even instructed payment gateway companies to shut down net banking services for customers involved in crypto, according to an ET report

Although the RBI released a statement on May 31 to clarify that its 2018 circular could no longer be cited since it was struck down by the apex court, it did not stop banks from refusing services to crypto businesses. Several major exchanges had reported difficulties with bank deposits since the incident. WazirX customers, for instance, had the option to only use MobiKwik wallet, a digital wallet, to deposit funds. 

After about a month, the option to deposit funds from the bank through unified payments interface or UPI method was added back. The UPI was designed by the National Payments Corporation of India, a non-profit organization owned by the RBI and the Indian Banks’ Association, and is governed by the central bank. The UPI method allows users to transfer funds between bank accounts from a single interface. 

After about three months since the emails were sent out, things are starting to go back to normal. WazirX has reintroduced the option to deposit funds through net banking although it is currently only supported by a few banks. Some of the major names in the list include Deutsche Bank, Federal Bank, IDBI Bank, Indian Overseas Bank and Punjab National Bank. 

CoinDCX, the country’s first crypto unicorn, is also providing net banking facilities from limited banks. But it is important to note that some of the country’s biggest banking names are missing from the list of supporting banks such as the State Bank of India, HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank, among others. But although some banks are falling in line, WazirX has curiously removed its UPI payment option again. 

Vishwanath said: “Our banking relations continue to be strong due to compliance procedures we follow at Unocoin.”

As confusion over the crypto regulatory space lifts, more and more banks are likely to resume their relations with crypto businesses. However, the full contents of the crypto bill are still unknown, and how the Indian government will regulate and tax cryptos remains to be seen until a draft of the bill is released. If the cabinet approval comes by November, the bill could be up for discussion in the winter session of parliament.