In India, such concerns have bubbled up in recent days, amid reports of the Enforcement Directorate (ED) probing some 10-odd cryptocurrency platforms for suspected money laundering of more than ₹1,000 crore.
This latest controversy once again brings into focus the lack of strong operational, governance and risk management practices at crypto exchanges, something that the International Monetary Fund has underscored in the past. But the lack of a global consensus is a big stumbling block in regulating cryptos and crypto exchanges.
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Have policymakers in India figured the right approach to regulating cyrpto products and exchanges?
Why are exchanges being probed?
Some 10-odd crypto exchanges are under the ED lens for alleged money laundering of about ₹1,000 crore—this sum is suspected to be the business proceeds of some dubious instant-loan apps, reportedly funded by Chinese entities.
The crypto exchanges are under the lens for lack of due diligence in the financial transactions under scrutiny, not raising suspicious transaction reports (STRs) and not maintaining proper KYC (know your customer) records.
A show-cause notice has been issued to crypto exchange WazirX under the Foreign Exchange Management Act (FEMA) for outward remittances of crypto assets of over ₹2,700 crore to unknown wallets.
Meanwhile, the public spat between WazirX and its operational partner Binance, a global cryptocurrency platform, over ownership and operational issues is also being monitored by the ED.
How is the crypto industry regulated in India?
In India, the crypto industry is largely unregulated at the moment. The Reserve Bank of India (RBI) has been wary of the inherently speculative nature of crypto products and banned virtual currencies in April 2018 but the Supreme Court struck down the central bank’s order in March 2020.
The RBI though continues to stridently oppose crypto products and platforms. This is what T. Rabi Sankar, Deputy Governor of the RBI, has said recently: “Cryptocurrencies are not amenable to definition as a currency, asset or commodity. They have no underlying cash flows. They have no intrinsic value. They are akin to Ponzi schemes, and may even be worse."
Sankar, in fact, went much further: “They (crypto) can (and if allowed most likely will) wreck the currency system, the monetary authority, the banking system, and, in general, government’s ability to control the economy."
The government’s proposed Cryptocurrency and Regulation of Official Digital Currency Bill of 2021 seeks to prohibit all private cryptocurrencies in India and instead create an official digital currency to be issued by the RBI. The lawmakers will decide its future in Parliament.
In the Budget, Finance Minister Nirmala Sitharaman introduced a 30% tax on transfer of digital assets like cryptocurrencies and a 1% TDS on every transaction. In a way, for the moment, it’s not illegal to own crypto assets.
But it’s not uncommon for cyber criminals to target crypto exchanges.
What’s been the global experience?
Money laundering through crypto exchanges has emerged as a global concern in recent years.
Criminals laundered $8.6 billion of cryptocurrency in 2021, a 30% jump over 2020, according to a report by blockchain data company Chainalysis.
By tracking crypto wallets operated by criminals, Chainalysis was able to estimate the money laundered in recent years. Europol, the law enforcement agency of the European Union, has also sounded a warning. According to Europol, the “illicit use of cryptocurrencies is predominantly associated with money laundering purposes, the trade of illicit goods and services, and fraud." It also points out criminal networks have adopted cryptos for large-scale money laundering.
Financial Action Task Force (FATF), an intergovernmental organisation, has sought global co-operation among countries to check the scourge of money laundering through cryptos.
“It is importance for countries… to understand the money laundering and terrorist financing risks associated with virtual asset activities and to take appropriate mitigating measures to address those risks," the FATF said in 2021.
Crypto exchanges are also often hacked by cyber criminals, siphoning billions of dollars in crypto assets. There were more than 20 hacks in 2021 where at least $10 million in digital assets were stolen from a crypto exchange or project, reports the NBC. A bitcoin scam by hacker Sriki sent shockwaves through Karnataka last year. Sriki reportedly hacked into the crypto exchange Bitifinex, which has a presence in over 50 countries.
As we said, would you invest in stocks if exchanges like the NYSE or our NSE and BSE were vulnerable to hacking? Therein lies the need to regulate the crypto industry.
How are countries regulating cryptos?
For the moment, a concerted and unified approach to regulating cryptos and crypto exchanges appears a remote possibility. The regulatory agencies have different approaches on cryptos.
The US Securities and Exchange Commission seems to treat cryptocurrencies as securities, and securities laws hold for digital wallets and exchanges. The Commodities Futures Trading Commission treats Bitcoin as a commodity and permits cryptocurrencies to trade publicly.
In Canada, cryptos are not legal tender but can be used as payment for goods and services. Crypto exchanges have to register with the Financial Transactions and Reports Analysis Centre of Canada. Japan recognises Bitcoin and other digital currencies as legal properties and crypto exchanges are legal and must register with the Financial Services Agency. China has banned all cryptocurrencies in September 2021 along with all exchanges.
Regulations will only be effective if there is a concerted global movement—remember, cryptos are traded on global platforms and are beyond the jurisdiction of any one single country. To keep cyber criminals from hacking into crypto exchanges and making them a conduit for money laundering, again a global movement is needed.
But for the moment, each country has its own crypto policy, making the task of regulating these virtual assets tougher. This may also have prompted the RBI to seek a crypto ban and convinced the Indian government that banning private cryptocurrencies is the wise thing to do.
