Let me guess. You've been thinking about starting a crypto exchange, started googling, and got stuck when trying to find proper information regarding the prerequisites and processes involved in getting a license to operate a crypto exchange in India.
The Indian laws surrounding emerging technology are still a bit unclear, although the recent emergence of crypto from the shadows has forced the government to take this issue seriously, and they have begun establishing clear norms and regulations. It is still a work in progress, and all the information stated in this article is subject to change. This article is written during Q1 2022 and reflects the current state of things, which may not be applicable in the near future if any new bills and regulations are put in place.
The fact that there are no specific licensing requirements that apply to the crypto exchanges operating in India has always been a boon for early adopters of the business model. However, this is going to change soon if the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is passed. At the moment, the crypto exchanges need to obtain customary approvals from the authorities for doing business in India in a manner similar to the process of starting any kind of company, in accordance with the Companies Act, 2013 and its underlying rules.
Naturally, crypto exchanges also have to obtain tax-related approvals and registrations from relevant tax authorities. The exchange would have to obtain
Besides these, the crypto exchange must also make sure it complies with the relevant tax laws by ex-filing of income tax returns, monthly deposition of withholding tax, filing quarterly withholding tax returns, withholding tax certificates, filing monthly and annual goods and services tax returns, etc., as expected from any entity that wants to operate and run any other business in India.
In the future, the cryptocurrency exchanges may have to seek licenses from a designated regulator (like SEBI) to conduct business in a manner similar to the equity and commodity trading platforms of today, once the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is passed.
Following the precedent set by exchanges in the equity markets, crypto platforms might have to fulfill certain eligibility criteria, such as minimum net worth and sticking to governance guidelines, to qualify for a license to conduct business in India. This may prompt crypto platforms to follow KYC norms and disclosure requirements, which negatively affect decentralized platforms, whose main selling point is user anonymity. Other initiatives by the government include
So now let's try to answer a question that might come to your mind after reading all of this.
The short answer is yes.
The slightly longer answer is that it is clear that the government will impose regulations that might restrict and control profit margins, but it will get to the point where the business will not be a lucrative venture as long as you start early.
The new regulations might benefit and safeguard small investors, reducing the high risk associated with crypto. A good start would be regulations that prescribe a minimum threshold for investment in virtual currencies. Crypto exchanges that do not comply with the eligibility norms could be fined up to Rs 200 million or face imprisonment for 1.5 years, depending on the severity of the transgression. The government could also consider allowing the National Stock Exchange and the Bombay Stock Exchange to set up separate crypto windows, similar to their commodity and currency segments.
The lack of clear regulations and the gray area regarding the taxation of Cryptocurrency and other digital assets leave a lot of questions unanswered.
The Reserve Bank of India (RBI) is the chief authority responsible for regulating the financial sector in India, officially acknowledged cryptocurrency in India for the first time through a press release in 2013, cautioning the users, holders, and traders of cryptocurrencies regarding the potential risks associated cryptocurrencies, and discouraged people from trading crypto. The RBI maintained this stance until 2018, when they issued a ‘Statement on Developmental and Regulatory Policies’ which expressly prohibited banks from dealing in cryptocurrency, making it impossible for private crypto exchanges to operate in India.
This led to the filing of a petition against the Statement of the RBI. This led to the supreme court of India squashing the bill, leading to a proposed issuance of a digital currency by the RBI called Central Bank Digital Currency (CBDC) / Digital Rupee which will use the underlying technology of cryptocurrencies but will be backed by the Government security.
On Feb 23, 2022, the Advertising Standards Council of India (ASCI), a self-regulated advertising authority, after consultation with the government, issued guidelines concerning the advertising and promotion of crypto assets in India and ensuring the protection of the interests of consumers.
The key takeaway is that it is essential to keep an eye on the developments that may happen soon. The regulators in India are still on the fence about classifying cryptocurrency as illegal or legal. So it is advised to seek the aid of an attorney and a cybersecurity expert before taking on the massive task of obtaining a license to operate a crypto exchange in India.
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