Web3 Roundup 2022 – Fin Tech

International

• International call for robust regulation and supervision of
  crypto assets: The Financial Stability Board (FSB) of which
  India is a member issued a statement amid the recent volatility in the
  crypto market, stressing the need for robust regulation and
  supervision of crypto assets. The FSB is an international body of
  senior policy makers, regulators and central bankers from the G-20
  countries which monitors and makes recommendations on the global
  financial system. The FSB had earlier warned of risks to global financial
  stability from crypto assets. FSB wants crypto asset providers to
  comply with regulations that apply to players in the traditional
  financial system on the principle of “same activity, same
  risk, same regulation”.

The FSB statement calls on its members to implement
international standards such as the Financial Action Task Force
(FATF) recommendations. The FATF recommendations require that
virtual asset service providers be regulated for anti-money
laundering and countering the financing of terrorism (AML/CFT)
purposes, that they be licensed or registered, and effectively
monitored or supervised. India will have to keep these requirements
in mind and build a supervision mechanism for crypto transactions.
These requirements are bound to bring about strict regulations and
restrictions for the industry. Meanwhile, India’s recent cyber
security directions already require crypto providers,
exchanges, wallets to collect and store information about customers
similar to a KYC (Know Your Customer) requirement and also maintain
records of financial transactions for a 5-year period in such a way
that individual transaction can be reconstructed along with the
relevant elements. These requirements have already been criticised
as overbroad and concerning for user privacy.

Legislation

• Global consensus required before regulating crypto:
  The Indian Finance Minister told Parliament that the Indian central bank
  was in favour of banning cryptocurrencies, but added that
  regulation or banning of cryptocurrencies could be effective only
  after “significant international collaboration” on its
  risks, benefits and standards.

This suggests that the government is unlikely to make a unilateral decision to ban
cryptocurrency in the near future and will instead, wait for a
global consensus on the subject. This also mirrors the Prime
Minister’s call for international collaboration to regulate
cryptocurrency. With the government not in a rush to lay down the
law, we can expect the regulatory uncertainty around crypto to
continue for some time.

• No law prevents startups from crypto or Web3
  innovation: In an interview with Inc42, Rajeev Chandrasekhar,
  union minister of state for IT, stated that there is no law
  preventing innovation in the crypto or web3 space, while answering
  a question on whether there is any delay in announcing
  laws/policies to promote web3/ crypto innovation. He stated that
  illegalities arise when crypto-exchanges or crypto-brokers act in
  violation of foreign exchange rules and operate without getting
  permissions from SEBI and RBI.

Tax

• GST on virtual asset transactions: Reports suggest that the government aims to
  bring clarity on indirect tax on virtual asset transactions
  (including mining and airdropping). The Finance Ministry plans to
  define the characteristics and use of cryptocurrencies and clarify
  how they fit into the Goods and Services Tax (GST) framework. The
  applicable rate of GST will depend on this classification. Reports preliminarily suggest that a new GST
  slab (between 18-28%) may be created for virtual asset
  transactions. Currently, the service fee levied by exchanges on
  virtual asset transactions is already subject to GST. But there is
  also a suggestion to defer a decision on taxability
  of cryptos and other VDA till a law on crypto is put in place. Some
  stakeholders believe that a GST charge overlayed on the income tax
  and TDS requirements will “finish the industry.” There is
  a view taken by some tax consultants that even at present there is
  a marginal risk of crypto transactions being subject to GST. A
  famous Indian celebrity has already been issued with a
  notice to pay GST at 18% on the sale of his NFTs.

Enforcement/ Investigations

• Enforcement Directorate (ED) unfreezes
  WazirX’s bank accounts: The ED reportedly granted WazirX, a cryptocurrency
  exchange, permission to use its bank accounts again. The ED is
  investigating money laundering through crypto exchanges. The
  unfreezing of WazirX’s accounts reportedly results from (a) WazirX’s
  cooperation in sharing all documents related to suspicious accounts
  and (b) WazirX having already flagged and blocked suspicious user
  accounts. The ED had, frozen WazirX’s accounts earlier, alleging
  that WazirX had assisted in money laundering.

• Cryptocurrency exchanges are being investigated for alleged
  money laundering. According to reports, the Enforcement
  Directorate (ED) is investigating at least 10
  cryptocurrency exchanges for laundering more than INR 1,000 crore.
  The ED is currently tracing how instant loan apps (many having a
  Chinese connection) might have sent proceeds of alleged criminal
  activities out of India. The ED raided five premises linked to
  CoinSwitch Kuber. Yellow Tune Technologies Private Limited (an
  entity associated with the accused NBFCs and fintechs) in
  laundering illegal proceeds (through the crypto route). It also
  ordered freezing of fiat and crypto balances worth INR 370 crores
  of Technologies Private Limited held with Flipvolt Technologies
  Private Limited (the Indian entity of Vauld).

CBDC

• CBDC-retail trials (e?) : The CBDC-retail segment
  pilot was launched on 1 December 2022. The platform is being hosted by the National Payments Corporation of
  India (NPCI). RBI wants each bank to test
  CBDC-retail with 10,000 to 50,000 users, and has designed the
  system to make it interoperable with existing payment systems. Some
  of banks taking part in the trial project include- State Bank of
  India, Bank of Baroda, Yes Bank, ICICI Bank, HDFC Bank. Read more
  about the e? pilot here.

• Anonymity achieved in all retail Central Bank Digital
  Currency (CBDC) wallet-to-wallet dealings so
  far: Reportedly, all wallet-to-wallet transactions
  of the CBDC in the retail segment remain anonymous, and do not get
  reflected in the core banking system. This feature will boost customer confidence to use the
  digital rupee. While the RBI will know the aggregate retail CBDC in
  circulation – it will not know who owns how much of the
  retail transaction.

• India’s Central Bank Digital Currency
  (CBDC) makes start in real-time trades:
  Government securities to the tune of INR 275 crore were traded using the RBI’s CBDC, as part of a
  pilot project in the wholesale segment on 1 November 2022. The RBI
  opened a new platform called ‘Negotiated Dealing System- Order
  Matching (NDS-OM) CBDC’ for select banks to conduct
  transactions of government securities amongst themselves. Selected
  banks included State Bank of India, Bank of Baroda, HDFC Bank,
  ICICI Bank, Kotak Mahindra Bank, amongst others. Some of the
  benefits accruing from this transaction are: no intermediary risk
  as banks are dealing directly with RBI, CBDC-wholesale transactions
  are free, interbank market is more efficient. Future pilot projects
  are expected deal with other kinds of wholesale transactions and
  cross-border payments.

• Confederation of all India traders (CAIT)
  to launch nationwide campaign to promote digital rupee:CAIT,
  welcoming RBI’s move to introduce the retail version of the
  digital rupee, declared that it will launch a nationwide
  movement amongst the trading community to adopt and accept the
  digital rupee as a mode of payment in business.

G20

• Crypto-assets and CBDC on India’s G-20 agenda: The
  agenda for G-20’s finance track under India’s presidency reportedly includes crypto-asset regulations
  and CBDC. The G-20’s Financial Stability Board is working on
  draft crypto regulations that can be adopted by member countries.
  Another priority is CBDCs and their use on a global scale,
  especially for cross- border payments.

Investments

• Investors move towards web 3.0 gaming investments: According to venture investment research firm
  Tracxn, web 3.0 gaming firms in India raised USD 620.5 million in
  2022 across 32 deals, which represents a sixfold jump from USD
  115.3 million raised across 39 deals last year. This comes in spite
  of a funding winter plaguing startups worldwide.

States

• Telangana government launches web 3.0 regulatory
  sandbox: The government of Telangana has launched a web 3.0 regulatory sandbox that
  permits local and international firms or innovators to test their
  products in a ‘live’ environment. The regulatory sandbox
  will help firms in navigating the regulatory space and provide a
  definite structure to their product testing process thus improving
  efficiency. The sandbox may also help the regulators identify the
  regulatory barriers to beneficial innovation.

Miscellaneous

• Indian Web3 industry forms a new association: Indian
  web3 companies have formed a new association called Bharat Web3
  Association (BWA). The members include WazirX,
  CoinDCX, CoinSwitch Kuber and Coinbase but also non-exchange
  companies like Hike and Polygon. The previous industry body,
  Blockchain and Crypto Council of India (BACC), was
  dissolved by the Internet and Mobile
  Association of India earlier this year. Unlike BACC, BWA has a
  broader vision and includes more verticals in the Web3 space like
  NFTs, gaming, etc, which is sensible from a policy advocacy
  standpoint.

• Central government to launch awareness campaign on crypto
  and online gaming: Reportedly, the Investor Protection and
  Education Fund (IPEF), under the ministry of
  corporate affairs, will launch outreach and awareness campaign
  highlighting the legal status of cryptocurrencies and online gaming
  platforms. The campaign will look to educate people about the risks
  associated with such platforms. This is the first time that the
  IPEF is carrying out a campaign on digital assets.

• Indian crypto-space after FTX collapse: In the
  aftermath of the collapse of FTX, Indian crypto exchanges like
  CoinSwitch and CoinDCX, have stated that they are implementing transparency
  measures to win back investor confidence. Some measures include
  publishing of ‘proof of reserve funds’, ‘proof of
  liability’ and founders’ declarations that the assets are
  greater than their liabilities.

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