While reports indicate that India has the highest virtual digital asset (“VDA”) adoption across jurisdictions, we are yet to see any concrete movement on a corresponding regulatory framework to govern the sector and provide legal clarity.
This FIG paper reports on recent global developments in cryptoasset regulation and sets out a wish list of considerations that must form a part of India’s regulatory conversation on VDAs in 2025.
United Kingdom
On November 26, 2024, the UK’s Financial Conduct Authority (“FCA”) published a ‘Crypto Roadmap’, outlining its plans and timeline to regulate the crypto asset sector. The FCA aims to address key areas like stablecoin regulations, trading platforms, financial promotions, and consumer protection for its cryptoassets legal framework. Further, consultation/ discussion papers will be published in the coming months for different aspects of digital asset regulation, such as custody, prudential considerations, trading rules, staking, etc. The full regime is expected to take effect in 2026.
In line with the above, on December 17, 2024, the FCA published the ‘Discussion Paper: Regulating cryptoassets: Admissions & Disclosures and Market Abuse Regime for Cryptoassets’ to address risks of market asymmetry, financial crime and insider trading.
Europe
Phased implementation of the European Union’s Markets in Crypto Assets Regulation (“MiCA”) has begun for issuers of asset-referenced tokens (ART) and e-money tokens (EMT) on June 30, 2024. MiCA will become applicable to crypto-asset service providers (“CASP”) from December 30, 2024. Stablecoin issuers face stringent reserve mandates, while CASPs must be authorised and comply with anti-money laundering (“AML”)/ combatting financing of terrorism (“CFT”) norms.
United States of America
The Securities Exchange Commission (SEC) has taken an aggressive stance on cryptoassets, classifying them as ‘securities’, leading to increased scrutiny and enforcement actions against digital assets exchanges and platforms. The recent ongoing lawsuit between the SEC and Ripple Labs over the classification of XRP as a security will have far-reaching implications for the crypto industry.
President elect Donald Trump’s pro-crypto position and executive appointments of industry proponents imply an unprecedented support for cryptoassets in the 119th Congress. We may see a unified approach to crypto policy, which had been fragmented up until now.
Japan
The Financial Services Agency, Japan’s financial regulator, proposed a new business category for crypto intermediaries, with light-touch regulation in November 2024. The proposed “cryptocurrency and electronic payment instrument intermediary business” category would apply relaxed rules to crypto brokerage businesses, which would otherwise be required to register as digital assets exchanges that are subject to more stringent regulations for AML/ CFT, customer asset custody, etc. This category ensures gaming companies, telecommunication providers and other fintech companies, which intend to operate virtual assets, are not treated with the same stringency as digital exchanges.
In addition, Japan is working on publishing tax and remittance rules on cryptoassets soon.
Cues for an Indian Regulatory Framework in 2025
In our previous FIG paper, we had discussed learnings from initial interactions with the Financial Intelligence Unit of India’s (“FIU-IND”) VDA regulations. The Department of Economic Affairs was due to publish a consultation paper on the regulatory policy for VDAs. However, on December 16, 2024, the Ministry of Finance (“MoF”) clarified in Parliament, that there is “no timeline anticipated for introduction of comprehensive regulatory guidelines for VDA industry in India”. While the government has been in a wait-and-watch mode, in 2025, the MoF may consider the following:
- VDASP Definition Too Wide: The MoF notification dated March 7, 2023, casts too wide a net, bringing a variety of VDA service providers (“VDASP”) within a one-size-fits-all compliance framework, which is meant only for entities that pose a money laundering/ terror funding risk. This equates B2B VDA issuers, software-as-a-service (SaaS) entities and technology providers, which do not have consumer touch points with VDA exchanges, which require more stringent regulation. Stratified regulation with grades of compliance, based on risk assessment (akin to Japan’s model), is critical for the development of different types of intermediaries within the industry. Else, it can unintentionally stifle innovation or cause capital flight, even in adjacent emerging technology spaces that want to explore VDA synergies.
- Inflexible KYC/ AML Standards: The ‘AML & CFT Guidelines for Reporting Entities Providing Services Related to Virtual Digital Assets’, dated March 10, 2023, prescribe submission of Permanent Account Number (PAN) and any other officially valid document, including Aadhaar. If Aadhaar is used (which is typically preferred), a two-factor authentication is required. This includes physical verification using biometric/ iris without exception, which is unsuitable for an inherently digital sector. Even the Reserve Bank of India (“RBI”), India’s financial services regulator, permits alternate know-your-customer (KYC) verification methods if physical verification is not possible. Based on our market interactions, FIU-IND registered VDASPs use these alternate standards prescribed by the RBI for customer verification since physical verification is unsuitable for a sector that is inherently digital in nature. Clarification/ exemption from the FIU-IND would be welcome.
- Self-Regulation as Interim Solution: Crypto has become a hot potato for Indian regulators, with GIFT City’s International Financial Services Centre Authority (IFSCA) also entering the mix, along with the RBI and Securities & Exchange Board of India (SEBI). While the industry actively works with the FIU-IND on AML/CFT, it was not originally intended to enforce trading rules, market abuse, and prudential regulation. FIU-IND’s mandate would have to be enlarged by legislation or assigned to a well-equipped regulator. Till such time, self-regulatory bodies, on the lines of RBI’s self-regulatory organisation (SRO) framework, and cooperative standard setting, based on market best practices, could fill the gaps. The Indian crypto industry has proven to be a self-starter on multiple occasions – the voluntary registration of Indian exchanges with the FIU-IND, and the Alliance for Blockchain and Crypto Defence (ABCD) initiative for cybersecurity standardisation by the Bharat Web3 Association are examples of the industry’s ability to self-regulate.
Way Forward
With Australia, Brazil, Hong Kong, and South Korea in the process of releasing new regulation, governments are acknowledging that regulatory frameworks offer legal clarity and legitimacy to digital assets businesses, which will only grow in importance, driven by global financial tailwinds.
India has a first mover market advantage, owing to its retail adoption. Global businesses are bullish on the country, but tentative because of lack of regulatory clarity. We should not lose out because we are looking for a perfect solution.
