India’s G20 presidency: For Virtual Digital Assets

Virtual Digital Assets (VDAs) were, for the longest period, considered forbidden fruits, capable of causing financial instability and compromising transactional integrity. These assets, defined by the Financial Action Task Force (FATF) as a form of digital representation of value, worthy of digital trade, transfer, or making payment, have largely been subjected to a wait and watch approach. Despite India having a huge investor base and market capitalistion, the sector has been deprived of any sort of regulation in the country. However, several emerging and developed market economies are taking measures to partly regulate the sector e.g., India’s recent reform to include VDAs under the Prevention of Money Laundering Act (PMLA).

The ongoing G20 intergovernmental forum, under India’s presidency is being seen as a launch pad for a global VDA regulation. It is a conducive platform for policymakers and stakeholders across the G20 countries to collaborate and devise a strong global framework for VDA enforcement. India’s Finance Minister, on multiple occasions, reiterated that “crypto has been a very important part of the discussion under India’s G20 Presidency, given so many collapses and shocks. We seek to develop a common framework for all countries to deal with this matter”. Now, the stage has been set and the time is ripe for VDAs to be domestically and internationally regulated by a set of comprehensive laws, guided by multilateral organisations including the International Monetary Fund (IMF) and the Financial Stability Board (FSB).

India has already begun engaging in dialogues concerning VDA regulation and it is vital to consider an SOP which details out priority areas, commonly identified by governments and regulators worldwide. A comprehensive SOP, ensuring appropriate regulatory agility and enforcement tools, will not only overcome the existing gaps in regulation but will also enable immediate intervention of law enforcement agencies for remedial measures and prevention of harm and misuse. An SOP focused on the four priority areas - Consumer and Investor Protection, Access to Law Enforcement Agencies to Address Fraudulent Practices, Regulatory Arbitrage and Financial Stability – holds the potential to address the existing lacunae in the VDA framework.

These priority areas can set the basis for all G20 countries to develop regulations for virtual digital assets as well as supplement the work currently being undertaken by the IMF and the FSB for the adoption of a consistent and comprehensive policy approach.

In the international scenario, consumer protection in relation to VDAs is driven predominantly from a disclosure-based approach. However, there is no universal template to formulate effective consumer protection standards, which have been adopted by the international community so far. An effective SOP can establish a centralised disciplinary regime through the implementation of mandatory licensing mechanisms, code of ethics, self-regulatory norms, and transparent communication channels from service providers. Similarly, a robust system would also empower law enforcement agencies in taking prompt actions against misuse and fraudulent activities.

India has taken a decisive step in this direction by including VDA service providers within the ambit of the PMLA and it has the ability to leverage its G20 presidency in heralding multilateral cooperation for regulatory oversight in VDA transactions. The absence of global governance standards and the reticence of governments in classifying VDAs as conventional securities exposes the VDA industry to regulatory arbitrage, resulting in non-integrated exchanges and deviations in the price across different exchanges. A well-defined framework can effectively ensure alignment with cross-border norms, facilitate smooth functioning of VDAs and resolve longstanding challenges around regulatory arbitrage.

A recently released report by Chase India and INDUSLAW, titled “Standard Operating Procedures (SOPs) to Regulate Key Concern Areas of Virtual Digital Assets (VDAs)”, can be seen as a starting point for VDA regulation through SOPs. It draws references from international best practices to identify SOPs to regulate the sector.

The Report highlights some of the crucial aspects that can be considered by the Indian government to regulate the sector, while keeping the broad principle of global cooperation in consideration. The Report emphasises the need for a Self-Regulatory Organisation (SRO) which is empowered and granted statutory status. It contemplates that the SRO shall work closely with the Government of India in formulating and ensuring the implementation of best practices and self-governing codes. It is also recommended that the Ministry of Electronics and Information Technology be designated to oversee the development and opportunities related to blockchain technology, VDAs, Web3 and other related emerging technologies. The SOPs proposed would involve Virtual Service Asset Providers (VASPs) adhering to certain minimum requirements pertaining to inter alia risk-assessment procedures, cyber-risk related assessment, timebound reporting of incidents, auditing, transparent grievance redressal mechanism, etc.

In a nutshell, taking into consideration the role that legislative commonalities play in addressing globally identified problems posed by VDAs, it is imperative that a standardized approach such as SOPs is opted for VDA regulation. Meanwhile, it is also important to engage with the ecosystem stakeholders so that all the crucial aspects are taken into consideration while developing a country-specific regulatory framework. This would ensure minimisation of existing ambiguities and obscurity pertaining to VDAs and facilitate its carefully calibrated enforcement.

The ability of the SOP to accommodate the ever-transforming nature of VDAs will prepare countries for unanticipated or exceptional circumstances by formulating Conflict of Law principles. SOPs can therefore help bring clarity and transparency to VDAs and could be a significant step in the development of a consistent practice and a principled approach globally towards financial assets like VDAs.

This article is authored by Kaushal Mahan, vice president, Chase India and Avimukt Dar, founding partner at INDUSLAW.