Amid Confusion About Rules, Indian Crypto Community Pushes for Regulatory Sandbox

In the seven months since India’s top court allowed banks to legally service crypto platforms, users and trade volumes at local exchanges have increased. But regulators have said little about the rules for crypto trading. 

Confusion can be detrimental to market growth. So to introduce more clarity, some in the Indian crypto community are pitching a way to let platforms stay active but in a cordoned part of the market, supervised by the regulators - otherwise known as a sandbox approach.

Initiated by crypto exchange BuyUCoin, the sandbox proposes a regulatory framework to bring crypto assets under existing regulations while also setting up a supervised space for startups to develop in the sector. The proposal also involves developing  an open-source interface to track crypto transactions and manage anti-money laundering (AML) and know-your-customer (KYC) compliance.

The proposed interface would pool information from exchanges and providers, and funnel it to regulators and governing councils via an application programming interface, or API.   

The draft policy and API white paper released on Oct. 10 draws parallels to approaches used by the Financial Conduct Authority (FCA) in the U.K. and the Monetary Authority of Singapore (MAS). The framework document notes that even though the Indian central bank has operational sandboxes for retail payments and fintech platforms, cryptocurrencies have been kept off the playground. 

India’s crypto regulation has been a bit of a roller coaster. Amid a fledgling market in 2018, the central bank, Reserve Bank of India, banned banks from servicing crypto businesses. After almost two years of restrictions and protracted legal  proceedings, the nation’s Supreme Court overturned the restriction in March this year. 

Rumors of another crypto trading ban made the rounds in September, but no such policy was announced. 

Shivam Thakral, CEO of BuyUCoin, said the idea for a sandbox became relevant after the RBI ban was overturned. According to Thakral, regulations are crucial for the Indian crypto market to protect users from recurring instances of fraudulent activity. 

Read more: Investors Flock to India’s DeFi Scene Months After Central Bank Ban Overturned

Compared to the international market, Indian users “still lack in data security as well as personal wallet security,” said Thakral. BuyUCoin’s document also notes that a missing regulatory framework keeps users from reporting legitimate crypto earnings for tax purposes and limits investor protections, discouraging money from flowing into the market. 

The proposed regulations hope to address this by involving banks in the customer vetting process, creating a supervised sandbox for startups in the sector and convincing the government to create a dedicated regulatory body for digital assets. 

Ashish Bansal, director of global application and development tech at GSK, is one of the contributors to the proposal.  

“Though the government is still quite skeptical about all these technologies, they need some organization, some private players or some association to kind of come up with these kinds of documents,” such as research reports or forums,  he said. 

The proposed sandbox approach could help bring some clarity to India’s regulatory space. The transaction-reporting framework proposed in the white paper also said that crypto exchanges and service providers could use the API to examine and report suspicious transactions to authorities in real-time. 

Even though most crypto exchanges claim to follow KYC guidelines similar to the banks, blockchain analytics and tracing services like Chainalaysis and Elliptic have not yet gained traction. 

Read more: India May Be Starting Its Biggest Bitcoin Bull Run Yet

“They are not popular among the Indian crypto industry, and also among the regulators on the other side,” said Sathvik Vishwanath, CEO of UnoCoin, a crypto exchange based in Bengaluru. 

While he expects these services to grow in popularity in the coming years, he said the requests exchanges currently receive from law enforcement haven’t yet required the use of sophisticated blockchain tracing. 

Even though UnoCoin, among other exchanges, reported a jump in users and trade volumes after the banking restrictions were relaxed, Vishwanath said a comparison of leading global exchanges and Indian exchanges shows local volumes remain small overall.

“Uncertainty is … actually the reason why we see [less volume] from India,” said Vishwanath, alluding to the lack of a clear regulatory roadmap from the authorities.