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The INRGrid Stable team has deep-dived to understand the nitty-gritty of Indian regulators’ stance on the emerging stablecoin market and existing compliances for the virtual digital asset class. The aspirant stablecoin company has also onboarded the LegaLogic agency to adhere to the existing regulatory aspects within India.<h2 id="header-0">Overview of Current Law for Stablecoin Businesses in India</h2>In India, there isn&#39;t a clear set of rules for trading virtual digital assets (VDAs) or for running virtual asset service providers (VASPs). However, such activities are not banned either. Cryptocurrencies cannot be used as official money or for regular transactions. In March 2023, the Indian government included all VASPs under the Prevention of Money Laundering Act, 2002 (PMLA) as reporting entities. This doesn’t mean crypto exchanges are regulated, but it aims to protect the financial system and customers from risks related to VDAs. VASPs are defined by their activities, which include exchanging VDAs with regular money, transferring VDAs, keeping VDAs safe, and offering financial services related to VDAs.<h2 id="header-1">Indian Central Bank’s Stance on Stablecoins:</h2>As per the Indian Central Bank, Reserve Bank of India (RBI) research, the USD-backed stablecoins can cause dollarisation of the Indian economy. As per the RBI recommendation, digital assets are dollar-denominated and also managed by foreign foundations. INRC is an INR-denominated stablecoin that is managed by an Indian entity. It is the first of its kind stablecoin to address Indian regulators&#39; concerns around rupee depreciation in the virtual digital asset market. The Indian government and the Reserve Bank of India (RBI) are cautious about stablecoins. Since many stablecoins are linked to foreign currencies, they are considered risky and could threaten India’s economic stability. There is currently a lack of clear regulation in the crypto space, leading to an environment where new products are introduced with little oversight. It’s important to do your own research (DYOR) before getting involved. Most countries are wary of USD-backed stablecoins due to their potential risk to financial stability. For example, the EU has restrictions on stablecoins not backed by euros. The RBI&#39;s concern about the dominance of the dollar might lead to future restrictions on USD-based stablecoins. It’s uncertain if INR-pegged stablecoins will be allowed as a countermeasure to dollar dominance, and we’ll have to wait for future regulations. INRC stablecoins aim to maintain a stable value by linking to India’s digital currency (e-₹), bridging the gap between unstable crypto assets and regular money. Users with e-₹ and digital wallets can create INRC using CBDC.Proposed Digital Token Issuance Framework:Token Types: Clear categories for different tokens, such as currency tokens (like Bitcoin) and investment tokens (similar to securities). Regulation: Joint oversight by RBI and SEBI to ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) rules and to promote fair market practices. Taxation: Clear rules on capital gains tax for digital assets, transparent corporate tax policies, and strict reporting requirements. Token Issuance: A fair, transparent process similar to an IPO for creating new tokens, ensuring security and fairness for investors. Innovation: Support for utility tokens, smart contracts, and community-driven governance models in decentralized businesses. Declaring VASPs as reporting entities does not amount to regulating crypto exchanges or crypto transactions. The PMLA amendment aims to safeguard the financial ecosystem and customers from the risks of trading in VDAs. The notification defines VASPs in line with the recommendations made by the Financial Action Task Force (FATF) in 2021. Stablecoin issuers must have Financial Intelligence Unit registration for operating their businesses within Indian jurisdiction.<h2 id="header-2">About Financial Intelligence Unit-India</h2>The Financial Intelligence Unit-India (FIU-IND) is the main agency in India that receives, processes, analyzes, and shares information about suspicious financial transactions. FIU-IND works with national and international agencies to fight money laundering and terrorist financing. It operates independently and reports to the Economic Intelligence Council (EIC), led by the Finance Minister.<h2 id="header-3">Core Functions of FIU-IND</h2>Intelligence Management<ol><li>Keeps a national database of reports on cash transactions, suspicious transactions, counterfeit currency, nonprofit organizations, and cross-border wire transfers, as required by the Prevention of Money Laundering Act, 2002 (PMLA).</li><li>Analyzes these reports for operational and strategic insights.</li><li>Handles requests for information from domestic law enforcement and intelligence agencies, as well as from foreign financial intelligence units (FIUs).</li><li>Shares useful intelligence with domestic law enforcement and foreign FIUs.</li></ol>Strategic Management<ul><li>Reviews operational and regulatory matters and recommends policy changes to combat money laundering and terrorist financing.</li><li>Raises awareness about money laundering and terrorist financing issues.</li><li>Enhances the financial sector&#39;s ability to identify and report suspicious transactions effectively.</li></ul>Prevention of Money Laundering ActThe Prevention of Money Laundering Act, 2002 (PMLA) is the main law that provides the framework to fight money laundering and terrorist financing. This law took effect on July 1, 2005. Under this law, engaging in any activity related to crime proceeds, like hiding or using them, can be charged as money laundering.Obligations of Reporting Entities Under PMLAEvery reporting entity (like banks and financial institutions) must appoint a Principal Officer and a Designated Director and inform FIU-IND of their details. They must also conduct client due diligence, keep records of specified transactions, and report them to FIU-IND.Client Due DiligenceReporting entities must:<ul><li>Identify and verify their clients.</li><li>Understand the purpose of the business relationship.</li><li>Determine if a client is acting on behalf of someone else and identify that person.</li><li>This due diligence should happen when opening an account and regularly throughout the business relationship.</li><li>Record Maintenance and Reporting to FIU-IND The following transactions must be recorded and reported to FIU-IND:</li><li>Cash transactions over ₹10 lakh (or equivalent foreign currency).</li><li>Connected cash transactions under ₹10 lakh if the total exceeds ₹10 lakh in a month.</li><li>Non-profit organization receipts over ₹10 lakh.</li><li>Cash transactions using fake currency or involving forgery.</li><li>All suspicious transactions, whether cash or not.</li><li>Cross-border wire transfers over ₹5 lakh with India as either origin or destination.</li><li>Purchase and sale of property worth ₹50 lakh or more. Suspicious Transaction Reports must be filed within seven working days of identifying a suspicious transaction. Reports on real estate transactions should be submitted quarterly by the 15th of the following month. Other reports are due monthly by the 15th of the following month.</li></ul>Suspicious TransactionsA suspicious transaction raises reasonable doubts that it may involve crime proceeds, is unusually complex, lacks a clear economic purpose, or might finance terrorism.<h2 id="header-4">Indian Leaders on Current State of Crypto Compliance</h2>The government&#39;s recent tax regulations and focus on anti-money laundering measures highlight the need for a balanced approach. A friendly regulatory regime, along with the points mentioned above, can propel stablecoin forward. The current state of crypto and stablecoin compliance in India is marked by increasing regulation, taxation policies, and government efforts to align with international standards. However, the country still lacks a comprehensive legal framework for both cryptocurrencies and stablecoins, which leaves room for ambiguity and regulatory uncertainty.Shashi Jah, Ex-Coinbase India legal and compliance head and partner at Jigsaw LawIndia currently lacks a dedicated law for cryptocurrencies. The government has primarily relied on existing financial regulations to address the sector. In 2022, the Indian government introduced tax measures for cryptocurrency transactions, which include:<ol><li>A 30% tax on profits from the sale of crypto assets.</li><li>A 1% tax deducted at source (TDS) on all transactions above ₹50,000 in a year. This TDS rule was introduced to track transactions more closely.</li></ol><blockquote>Indian crypto exchanges must register with Financial Intelligence Unit India (FIU-IND) and comply with the Prevention of Money Laundering Act (PMLA), specifically the guidelines related to AML &amp; KYC, Record Keeping, Transaction Monitoring and reporting suspicious transactions, to mitigate the risks of money laundering and illicit financial flows. Exchanges are required to follow stringent KYC processes to verify customer identities before allowing them to trade, aligning with global practices.</blockquote><img src="https://cspot-be.s3.eu-north-1.amazonaws.com/1728449728710_image_Stablecoin%20Summit.jpeg" /><blockquote>Although a Cryptocurrency and Regulation of Official Digital Currency Bill was expected, the bill has been delayed multiple times. It is anticipated to regulate the crypto sector with stronger KYC (Know Your Customer) and AML (Anti-Money Laundering) measures, possibly defining how private cryptocurrencies should be treated in India. India is aligning its regulatory stance with international bodies like the Financial Action Task Force (FATF). FATF’s Travel Rule for Virtual Asset Service Providers (VASPs) is expected to be incorporated into Indian laws, requiring crypto firms to collect and share information on the identities of both the sender and receiver in cryptocurrency transactions. India’s potential regulatory frameworks may soon reflect FATF guidelines, particularly around AML and KYC measures for both cryptocurrencies and stablecoins. Stablecoins are currently not specifically regulated in India, as there are no laws. that distinguish them from other cryptocurrencies. However, given that stablecoins often pose systemic risks due to their fiat-pegged nature, it is expected that they will be included in future regulatory frameworks. The government&#39;s concerns about stablecoins primarily stem from their potential risks, including:</blockquote><ul><li>Price volatility: Stablecoins often aim to maintain a stable value against a fiat currency, but their actual value can fluctuate.</li><li>Market manipulation: There is a risk of market manipulation, where individuals or groups can artificially inflate or deflate the value of a stablecoin.</li><li>Systemic risks: Stablecoins can pose systemic risks to the financial system, particularly if they are widely used and their value collapses.</li></ul>Sumit Gupta, CoinDCX, Co-Founder, highlights the state of crypto in India<blockquote>India&#39;s crypto landscape has indeed matured, reflecting a growing appetite for digital assets that extends beyond the initial hype. The involvement of institutional players, bolstered by the recent approval of ETFs and increased capital inflows, has significantly boosted confidence among traditional investors, prompting them to explore this emerging asset class. As the demand for diverse products grows, investors are showing heightened interest in DeFi tokens and pre-launch tokens, signaling a more sophisticated and nuanced market.” “A notable trend is the emergence of tier-2 and tier-3 cities as key adoption hotspots, alongside the increasing participation of women investors. This signals the development of a broader and more inclusive ecosystem. Despite ongoing regulatory challenges, the mandatory registration with FIU India has enhanced trust within the sector, although the 1% TDS remains a hurdle for many. India continues to lead in crypto adoption, and the industry’s resilience, coupled with the nation’s technological prowess, positions the country as a potential global leader in the Web3 space.</blockquote>Balaji Srihari, Business Head, CoinSwitch, comments on the regulatory landscape<blockquote>India&#39;s relationship with crypto-assets has transformed dramatically, evolving from initial skepticism to a more supportive and regulated approach. This shift has been fueled by the digital revolution and the growing integration of technology with finance, prompting a focus on responsible regulation and user protection over outright bans. The Indian government has made significant progress in establishing a regulatory framework for crypto-assets, with the introduction of PMLA guidelines. These guidelines require Virtual Digital Asset Service Providers (VDASPs) to register with the Financial Intelligence Unit-India and monitor transactions, representing a crucial step towards formalizing the crypto landscape in India. This is reflected in discussions during India&#39;s G20 presidency also, where crypto regulation was a significant topic. The growing acceptance of crypto-assets is reflected in the rising interest from both retail investors and institutions. Looking ahead, India has the potential to become a global hub for crypto-assets and blockchain technology, supported by its large youth population and dynamic startup ecosystem. The continued development of regulatory frameworks, combined with technological advancements, points to a promising future for crypto adoption in India.</blockquote>Sharat Chandra Founder at EmpowerEdge Ventures and Blockchain Evangelist<blockquote>India&#39;s regulatory landscape for cryptocurrencies and stablecoins remains complex and evolving. The consultation paper by the Department of Economic Affairs, Government of India, expected to be released in October, 2024, is likely to shed more light on the regulatory treatment of digital assets. Tokenized deposits for B2B payments are a promising use case for settlement and reconciliation efficiency.</blockquote><h2 id="header-5">Global Stablecoin Compliance and Regulatory Stance</h2>A recent European Central Bank (ECB) <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2987~1919e51abf.en.pdf?51818764e601f56ca4f1ed1d7276e20a" rel="noopener noreferrer nofollow">working paper</a> has found that stablecoins are vulnerable to shocks from changes in the U.S. monetary policy. Specifically, contractionary shocks negatively impact stablecoins more significantly than traditional crypto shocks, while money market funds (MMFs) tend to benefit from these conditions.Meanwhile, INRGrid team attended the Stablecoin Summit 2024 in Singapore. Here are some of the takeaways from the summit:Circle and Paxos are still far behind Tether because of their strict compliance and regulatory regime. Meanwhile, Tether is bypassing some of the compliances and independent auditing.The global stablecoin stakeholders discussed on interoperability, adoption, and regulations:<ul><li>Liquidity Provisioning</li><li>Utility</li><li>Brand awareness</li><li>Composability</li><li>Incentive Mechanism These above actions are still the top priority of the Stablecoin issuers. Not educating governments is a key roadblock for the secondary stablecoin markets.<img src="https://cspot-be.s3.eu-north-1.amazonaws.com/1728452010962_image_Stablecoin%20Singapore.png" />Institutions are now having a better understanding of stablecoin utility. For example, recent digital asset payment integration by WorldPay and other cross-border transaction facilitators.</li></ul><h2 id="header-6">Regulatory Actions by INRGrid Stable Private Limited</h2><img src="https://cspot-be.s3.eu-north-1.amazonaws.com/1728451012416_image_Screenshot%202024-10-09%20at%2010.01.59%C3%A2%C2%80%C2%AFAM.png" />The aspired stablecoin company has acquired a license from the Ministry of Corporate Affairs of India. The company has partnered with the LegaLogic agency (PVS &amp; Associates) to streamline its compliances. On top of that, INRGrid has also appointed an independent auditor from day zero to align its core competency of being transparent.<img src="https://cspot-be.s3.eu-north-1.amazonaws.com/1728450825582_image_Signed-%20CTC%20-%20CR1%20-%20Auditor%20appointment%20-%20August%2020%202024%20%281%29_page-0001.jpg" />LegaLogic dug deeper into the organization structure and business of a virtual digital asset issuer in India. We also looked at the structure of similar companies, such as Neblio Technologies Pvt Ltd (CoinDCX) and Zanmai Labs Pvt Ltd (WazirX). On digging deeper, it seems INRGrid Stable activity, and that of a payment aggregator is different. A ‘Payment Aggregator’ is a service provider that enables merchants to accept payments from customers through various methods such as credit cards, debit cards, bank transfers, and digital wallets.Whereas, as per our understanding, a VDA issuer / VDA platform is an entity that creates and issues virtual assets such as cryptocurrencies, tokens, digital coins, etc. or works as a digital marketplace where users can buy, sell, and trade cryptocurrencies. Considering the mandatory FIU registration, we still suggest proceeding with a Private Limited Company.<img src="https://cspot-be.s3.eu-north-1.amazonaws.com/1728450750552_image_Screenshot%202024-10-09%20at%209.59.32%C3%A2%C2%80%C2%AFAM.png" /><h2 id="header-7">LegaLogic Drafts Main Objectives for INRGrid Stable</h2><ol><li>To engage in the issuance, exchange, transfer, management and administration of e-rupee-backed (CBDC) stablecoins for Web3 businesses and other digital assets, including but not limited to digital representations of value, for various purposes such as liquidity, investments, and utility within the VDA ecosystem.</li><li>To offer custody, storage, safekeeping, and administration services for VDAs, CBDC and other digital assets, ensuring the security and integrity of the digital assets, including the development and maintenance of secure storage platforms or solutions.</li><li>To design, develop, operate, and deal in blockchain-based solutions, applications, digital platforms and networks, software solutions, digital technology and financial technology solutions for the exchange, transfer, buying, selling, and trading of digital assets.</li></ol>

INRGrid Stablecoin Compliance Report 2024

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