Sources close to the discussions told ET that concerns are being raised around the number of cryptocurrency exchanges operating out of India and how prices of the same cryptocurrencies tend to differ at the same time across platforms creating arbitrage opportunities.
The government has held several meetings over the last few days thrashing out issues with the crypto stakeholders.
Prime Minister Narendra Modi on Saturday held a meeting with regulators including the Reserve Bank of India (RBI).
On Monday, Jayant Sinha, chairman of a parliamentary committee, met several cryptocurrency exchanges and associations.
The government had earlier also raised concerns over transparency in cryptocurrency advertisements.
“There is a concern how any regulator will be able to monitor a large number of exchanges at a time when there is a huge price difference and an opportunity for a price arbitrage,” a person close to the development told ET.
Exchanges responding to the government concerns claim that due to the nature of blockchain technology and the sheer number of crypto assets it may be tough to restrict the number of exchanges and it would only create more issues.
However, exchanges are pushing that the government create or support a regulatory sandbox to check the new regulations first, maybe in international financial services centres.
“Rather than restricting the number of exchanges, price arbitrage scenarios can be addressed by regulating the prices and supply of crypto assets across any Indian platform, besides this interoperability between Indian platforms through tech enabled liquidity APIs (application programme interface) can also solve the arbitrage problems. There is a need for introducing a regulatory sandbox for the crypto industry,” said Shivam Thakral, CEO of BuyUcoin, a cryptocurrency exchange.
An API is essentially a programming interface through which different cryptocurrency platforms could “talk” to each other and even regulate prices or other issues.
Industry trackers say that price arbitrage is the very essence of cryptocurrency trading.
“Price arbitrage can be taken advantage of between exchanges within a country and in between different countries and since this is a global phenomenon and regulations and laws around the world are still evolving, there is nothing illegal about such price arbitrages. These price gaps get filled when participants’ trade across different platforms and that leads to prices between different platforms tuned into each other. It is an auto-correcting mechanism of prices,” said Kumar Gaurav, founder & CEO, Cashaa, an online banking platform for crypto assets.
As of now, there is no clarity on the total number of exchanges where cryptocurrencies are traded. There could be at least 25 to 30 known exchanges across the country. The RBI had even raised concerns around how the exchanges are settling the buy and sell side orders to arrive at a price.
Insiders tell ET that the government could come up with a broad framework in the first phase on cryptocurrencies. “The government cannot ban cryptocurrencies due to the Supreme Court order. The only way around would be to first come out with a broad regulatory framework that essentially just asks cryptocurrency exchanges to follow certain norms and make them responsible for any future fraud or other issue,” a person close to the development said.
The government could come out with the broad framework through an ordinance too as early as December, another person aware of the development said.
The central bank has been pushing the government to ban cryptocurrencies altogether in India. The RBI had asked banks to stop dealing with cryptocurrency exchanges in 2018, but the circular was quashed in 2020 by the Supreme Court.
On their part, the cryptocurrency exchanges have been pushing for either Securities and Exchange board of India (Sebi) or International Financial Services Centres Authority (IFSCA) as a regulator. According to a person close to the development, IFSCA in the meetings with the government has distanced itself from the issue.
The government is looking to define cryptocurrencies in the new draft bill that also proposes to compartmentalise virtual currencies based on their use cases, ET first reported on September 3. The cryptocurrencies will be treated as an asset/commodity for all purposes, including taxation and as per user case–payments, investment or utility, people close to the development said earlier.