The Latest on Crypto in India

Key updates on the G20, taxation, and regulation in the world’s most crypto-adopted country

India is the world’s largest country by population, seventh-largest by area, fifth-largest economy by GDP, and one of the fastest-growing economies in the world.

But there’s one area in which India is solidly in the lead: crypto adoption.

India ranked highest on Chainalysis’s 2023 Global Crypto Adoption Index, followed by Nigeria, Vietnam, the United States, and Ukraine. This factor alone makes India an exceptionally important country to watch within the crypto space.

But that just scratches the surface of the latest crypto developments in India. Domestically, recent changes to taxation and regulation have raised questions about the status and future of crypto in India. Coinbase even pulled out of India after two days for these reasons (but we’ll get to that later.)

Beyond that, India currently holds the G20 presidency, with agenda-setting ability over that critical international body, which includes the world’s largest economies, the European Union and African Union. This gave India the ability to steer the conversation around global crypto regulation at the September 2023 G20 summit in New Delhi, which we’ll cover in detail here.

All of these stories make now the perfect time to round up the latest crypto news from India, break down India’s domestic crypto policy, and explore their role in international crypto regulation. We also landed an exclusive interview with Dr. Prakash Kamaraj, Head of Blockchain Technology at Chingari. Chingari is the largest on-chain social graph with tens of millions of users in India, and Pontem is proud to have them as a partner.

Leading the World in Crypto Adoption

Chainalysis recently published their 2023 Global Crypto Adoption Index, which evaluates nations and regions to track crypto adoption around the world. Using “transaction volumes for different types of cryptocurrency services and protocols based on the web traffic patterns of those services’ and protocols’ websites,” Chainalysis scores each country in five categories:

• Cryptocurrency value received at centralized exchanges -- the amount of cryptocurrency transacted in each country on centralized exchanges, weighted by purchasing power parity (PPP, a measure of per capita wealth)
• On-chain retail value received at centralized exchanges -- an estimate of non-professional crypto activity, measuring the amount of cryptocurrency exchanged in transactions below $10,000, weighted by purchasing power parity Peer-to-peer (P2P)
• Peer-to-peer (P2P) exchange volume -- the amount of money exchanged on-chain between residents, weighted by PPP and number of internet users
• On-chain cryptocurrency value received from DeFi protocols -- weighted by PPP
• On-chain retail value received from DeFi protocols -- same as above, measuring transactions below a certain amount to capture non-professional use, and weighted by PPP

Though this methodology has some drawbacks (only centralized exchanges are measured, measurement is made difficult by VPNs and other anonymizing tools, weighting by PPP biases the ranking toward poorer countries), this is the best available analysis of which nations are using crypto the most. And India leads the pack by far.

India is the most crypto-adopted nation, ranking first in four out of 5 categories. India ranked fifth in P2P transactions, surpassed by Nigeria, Vietnam, and others. India jumped up from fourth place in the 2022 ranking, when it trailed behind Vietnam, Philippines, and Ukraine.

“Crypto is becoming increasingly prevalent in everyday life in India,” said Dr. Prakash Kamaraj, Head of Blockchain Technology at Chingari. “Awareness and adoption are growing steadily. People are exploring various use cases, including investments and remittances.”

The statistics around crypto in India are staggering. According to Statista, there are more than 200 million crypto users in India -- roughly 20% of the population. More than $250 billion in crypto was received in India last year, trailing only the United States in raw transaction volume.

Dr. Kamaraj noted that crypto adoption in India is quite diverse. “Initially, it was predominantly tech-savvy individuals and early adopters who used cryptocurrencies,” he said. “However, as awareness has spread, a broader demographic is entering the crypto space. Young professionals, entrepreneurs, and even some retail investors are now participating. DeFi, in particular, has gained significant traction due to its potential to provide financial services to the unbanked or underbanked population.”

Chainalysis notes that India is leading Central and Southern Asia to be the future of crypto adoption, alongside Vietnam, the Philippines, Indonesia, Pakistan, and Thailand. India is a Middle Lower Income country alongside Nigeria and Ukraine, which was another important category for global crypto adoption.

Despite all this good news, Chainalysis notes that India has seen a great deal of regulatory clarity emerge around crypto in the past year -- and that may not be very good news for the space.

Increased Crypto Taxes -- and a Possible Ban?

Despite its immense popularity, crypto has had a checkered regulatory past in India. In 2018, the Reserve Bank of India (RBI) banned Indian banks from dealing with cryptocurrency at all. This was overturned by the Supreme Court in March 2020, allowing banks to handle cryptocurrency transactions from exchanges and traders. But the government has since tightened restrictions and instituted new taxes around crypto.

In July 2022, new taxes were introduced which targeted crypto users. The new tax slab introduced a 1% tax deducted at source (TDS), which applies to any transfer of virtual digital assets, as well as a flat 30% tax on crypto profits. This had an immediate chilling effect, with volumes on popular exchanges plummeting 10 to 70% in the week after the new laws went into effect.

“These tax regulations have led to increased compliance requirements and some uncertainties,” said Dr. Kamaraj. “However, it's essential to note that clear tax guidelines can also provide legitimacy and encourage more responsible crypto usage in the long run.”

Numerous industry leaders lobbied against these new taxes, particularly the TDS, and even expected a change. But when the 2023 Union Budget was introduced, not only was the TDS still in place, but penalties for non-compliance had been stiffened. Businesses and individuals who do not pay the required TDS on their transactions can be punished with fines or 3 to 7 months in prison under Section 271C of the Income Tax Act. This both significantly increases the record-keeping burden for exchanges, and disincentives traders from using decentralized platforms which would make compliance difficult for themselves.

In its December 2022 Financial Stability report, the RBI continued to speak about crypto, and stablecoins in particular, in harsh terms. They wrote that the crypto “market remains volatile,” and white “there have not yet been any spillovers onto the stability of the formal financial system,” they are forming an “unstable ecosystem” which poses a risk to the rest of the economy. They posited three possible solutions:

1. Subject stablecoins to the same regulation as traditional financial intermediaries and exchanges because they pose similar risks.
2. Ban crypto entirely. But they note this is challenging since stablecoins operate across different countries with different legal systems and powers.
3. Allow stablecoins to operate unfettered, on the theory that they will become “systemically irrelevant as the underlying instability and riskiness will ultimately prevent the sector from growing.” (This is perhaps the clearest indication of the Indian government’s dim view of stablecoins in particular. We’ll explain this further below.

Why Coinbase Left India After Three Days

These new rules came to a head back in May 2022 when Coinbase, the second-largest crypto exchange by volume, canceled a long-awaited launch and withdrew from India after only three days.

Several back-end payment providers, which make it simpler for Indian customers to onboard and deposit rupees, had ceased or altered their operations around that time in order to comply with the new tax laws. This included Unified Payments Interface, a widely used payments system operated by the the National Payments Corporation of India (NPCI). While Coinbase claimed to be using UPI for its Indian launch, UPI claimed it was unaware of this. Without a payment provider, Coinbase was unable to process deposits or withdrawals.

CEO Brian Armstrong sub-tweeted the RBI, suggesting that their “shadow ban” on crypto transactions was a violation of the 2020 Supreme Court ruling, which reversed the 2018 ban. Armstrong even pointed to "informal pressure" from the RBI as reason for the exit. However, neither side pursued further legal action and Coinbase remains inactive in India as of September 2023.

We can hopefully expect greater regulatory clarity in India very soon. In September, Ajay Seth, Secretary of the Department of Economic Affairs, told reporters that “India's position will be decided in the coming months” based on the recommendations of the 2023 G20 summit in New Delhi. But, there’s more to that story as well: India is president of the G20 for 2023.

International Crypto Regulation at the G20

In addition to leading the adoption ratings and international regulation, India is making waves international in the crypto space. For 2023, India led the G20 international summit as the president nation, giving it agenda-setting authority and mouthpiece role for the nation’s leading economies. The G20 includes 19 of the world’s largest economies, plus the European and African Unions.

As President, India was able steer discussion at this year’s meeting and crypto was top of their agenda. To begin, they commissioned the International Monetary Fund (IMF) and Financial Stability Board (FSB, an international watchdog for the global financial system) to issue a joint report with recommendations. Altogether, the paper aims to “address financial stability, financial integrity, market integrity, investor protection, prudential and other risks derived from crypto-assets.”

Key Findings From the FSB/IMF Report

• These bodies view crypto assets with deep skepticism. “Widespread adoption of crypto-assets could undermine the effectiveness of monetary policy, … exacerbate fiscal risks, … and threaten global financial stability,” they wrote.
• Criminal and terrorist use of crypto assets remains a top concern. The paper recommends that anti-money laundering and counter-terrorist financing (AML/CTF) standards are applied globally to crypto transactions.
• Blanket bans are not recommended, as they are technically challenging to implement and may simply cause capital flight into“other jurisdictions.”
• Emerging markets and developing economies (such as India) may need more regulation than richer countries because they face “elevated macrofinancial risks from crypto-assets.”
• The paper gives broad recommendations for regulating the industry, such as that countries should use their existing regulatory powers to the maximum, align their frameworks, and cooperate internationally. They also recommend that companies be required to adopt governance, risk management, data reporting, and disclosure requirements in line with existing securities laws.
• The report lists additional (but similar) recommendations for stablecoins, indicating that they view stablecoins as especially important to regulate, writing that they could “cause significant risk to financial stability.”

India responded to this report in their Presidency Note, in which they reiterated their agreement with the report and its recommendations, and stressed their desire for additional regulation.

According to Dr. Kamaraj, “India's focus on global crypto regulation during its G20 presidency reflects the government's commitment to addressing crypto's challenges and opportunities. From an economic and geopolitical perspective, India's stance on crypto can shape its image as an innovative and forward-thinking nation. It can also impact how India engages with international partners on issues related to digital currencies and blockchain technology.”

Results of the G20

While this report advances global crypto regulation significantly, it does not offer much clarity on the rules of each specific nation. Debate has progressed between the richer G7 nations and the rest of the G20 over stablecoin regulation in particular. As recently as August, the RBI was pushing the FSB to include stablecoins in their synthesis paper.

While richer nations with stronger currencies seem to prefer broader regulation of stablecoins, developing economies like India have suggested bans (as in the 2022 RBI Financial Stability report.) However, with the FSB/IMF discouraging these blanket bans, this path seems less likely. The difference largely stems from the relative fragility of these countries; emerging markets are more susceptible to macro-financial ill-effects from stablecoins.

Looking ahead, member nations have until the end of 2025, when the FSB will review how their recommendations were implemented. WIthin India, momentum seems to have slowed toward an outright stablecoin ban. The RBI, the longtime backer of the stablecoin ban, is ultimately unable to make the final decision. That lies with Prime Minister Narenda Modi’s Finance Ministry, who have signaled their preference for other regulatory options.  

Other Government-Sponsored Crypto Developments

Beyond the headline stories, several other intriguing developments are taking place in the Indian public sector:

The Indian Ministry of Electronics and Information Technology (MeitY) has launched the Indian Web Browser Development Challenge, encouraging developers to build a next-generation web browser with a $400,000 prize. One of the required features is the ability to “digitally sign documents using a crypto token, bolstering secure transactions and digital interactions.” This means that the Indian government is sponsoring the development of a new browser with web3 capabilities.

The Reserve Bank of India, while pushing for stablecoin bans, is developing a Central Bank Digital Currency (CBDC) of its own. The so-called digital rupee is currently in an expanded pilot phase, with 13 participating banks across numerous cities. The initial use case for the e-rupee is interbank settlement of government securities.

The Indian crypto industry is developing rapidly, and we’ll be sure to keep you updated. Follow us on X (Twitter), Discord, and Telegram so you don’t miss what happens next!

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