SEBI’s Regulatory Landscape for Cryptocurrency-linked Shares in India.

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Categories: ARCHIVE, Journal, JOURNAL
THE LAWWAY WITH LAWYERS JOURNAL
VOLUME:-9 ISSUE NO:- 9 ,MARCH 10, 2024
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SEBI’s Regulatory Landscape for Cryptocurrency-linked Shares in India. 

 

Authored by:- Rolin Fernandes 

2nd Year LL.B 

IFIM Law School, Bengaluru 

 

Keywords: 

Cryptocurrency, Bitcoin, SEBI, Crypto linked Shares, Stock Markets, Company

 

Abstract: 

The financial sector has seen a sharp increase in interest towards investment in cryptocurrencies in recent years, which has compelled regulatory bodies worldwide to address the difficulties these digital assets present. India, a prominent participant in the international financial market, has not deviated from this pattern. The nation’s securities market regulator, the Securities and Exchange Board of India (SEBI), has been closely observing advancements in the cryptocurrency area and investigating potential regulatory actions to mitigate related risks, especially about shares tied to cryptocurrencies. A new kind of financial instrument that connects the regular securities market with cryptocurrencies is the cryptocurrency-linked shares. These shares expose investors to the possible profits of the cryptocurrency market by representing ownership in businesses that hold cryptocurrencies or carry out associated activities. However, because of the market’s inherent volatility and lack of regulation, they also pose particular regulatory issues.

 

However, there are obstacles in the way of SEBI’s attempts to control shares related to cryptocurrencies. The ever-changing cryptocurrency landscape and the quickening speed of technology advancements make it difficult for authorities to create efficient regulatory frameworks. Furthermore, because cryptocurrencies are worldwide in scope, changes to regulations in other countries may have a huge impact on India’s regulatory environment. Working together with other regulatory agencies and international organizations will be essential as SEBI navigates the relationship between cryptocurrencies and traditional securities going forward. To reduce cross-border risks and increase investor confidence in the dynamic financial ecosystem, regulatory approaches should be harmonized and best practices should be shared. In the end, SEBI is essential to determining how shares connected to cryptocurrencies will develop in India and assisting in navigating the complexity of the digital asset market.

 

Introduction: 

Understanding the role of SEBI.

The regulatory body in charge of managing India’s commodities and securities markets is called SEBI, or the Securities and Exchange Board of India. It was founded in 1988 and is run under the 1992 SEBI Act. Protecting investor interests in securities markets, encouraging the growth of equitable, transparent, and efficient securities markets, and enforcing laws and regulations about the securities market are the main responsibilities of SEBI.

 

Understanding the concept of Cryptocurrencies.

On the flip side, cryptocurrencies are digital or virtual money that run on decentralized networks powered by blockchain technology and employ encryption for security. Cryptocurrencies are not governed by a single entity and are usually not supported by physical assets, in contrast to conventional currencies that are issued by governments or central banks.

 

Cryptocurrency-linked shares: 

Companies that are exposed to cryptocurrencies through their business operations create cryptocurrency-linked shares. These businesses might invest in blockchain technology, keep Bitcoin as part of their treasury reserves, or provide services linked to cryptocurrencies like trading, mining, and payment processing. Investors can indirectly participate in the performance of these companies’ bitcoin holdings or operations by purchasing cryptocurrency-linked shares. Shares tied to cryptocurrencies are arranged similarly to regular equity shares that businesses issue. Each share entitles the holder to a piece of the company’s assets and revenues, representing a fractional ownership interest in the business. The value of shares connected to cryptocurrencies is determined by the performance of the company’s cryptocurrency holdings, as opposed to regular shares, which are based on the company’s performance in conventional markets

 

There are three kinds of crypto-linked shares: 

  • Direct Holdings: As part of their treasury reserves, some businesses list their direct cryptocurrency holdings on their balance sheets. These corporations issue shares that are directly correlated with the value changes of the cryptocurrencies they own.
  • Indirect Exposure: Businesses that mine, trade, or provide blockchain-based services in the cryptocurrency space may also issue shares connected to the cryptocurrency. Through the company’s business operations, these shares give investors indirect exposure to the performance of cryptocurrencies.
  • Derivative Products: Exchange-traded funds (ETFs) and structured products that track the performance of a basket of cryptocurrencies are examples of derivative products that financial institutions may occasionally develop. Without actually holding Bitcoin, investors can purchase shares of these instruments to get exposure to the market.

 

The intersection between Cryptocurrencies and SEBI:

SEBI and cryptocurrency have a complicated and dynamic relationship. Since cryptocurrencies were not yet classified as securities under the applicable legislation, SEBI initially lacked clear regulations governing them. To safeguard investors and uphold market integrity, SEBI started looking into measures to control cryptocurrency trading and issuance as they became more well-known and drew large investments.

 

In the past few years, SEBI has acknowledged cryptocurrency’s potential as a cutting-edge asset class and taken action to mitigate the risks attached to it. Investors have received warnings from the regulatory body regarding the speculative nature of cryptocurrency investments and the absence of regulatory supervision. Additionally, SEBI has stressed the importance of educating and informing investors about the dangers associated with trading cryptocurrencies. Additionally, SEBI has been investigating whether current securities rules may be used to regulate cryptocurrency exchanges and initial coin offerings (ICOs). According to the regulator, cryptocurrencies that are classified as securities will come within its purview and be governed by all relevant laws, rules, and regulations, including those about registration, disclosure, and compliance.

 

The decentralized and worldwide character of cryptocurrencies means that, despite SEBI’s best efforts to govern them, the regulatory environment is still unclear. Enforcing and regulating cryptocurrencies effectively is hampered by the lack of comprehensive legislation. Furthermore, SEBI’s strategy for regulating cryptocurrencies in India may be influenced by regulatory developments in other nations.

 

Recent developments:

In recent years, cryptocurrencies have piqued the interest of investors worldwide, promising decentralized finance, borderless transactions, and potentially rich profits. India has not been an exception to this global trend, with its growing population of tech-savvy people and vibrant digital economy. However, the Securities and Exchange Board of India (SEBI) has struggled to strike a balance between promoting innovation and protecting investor interests, leaving the regulatory environment surrounding cryptocurrencies in India characterized by ambiguity and confusion. Several noteworthy events have shaped the regulatory framework controlling these digital assets, and as a result, the relationship between SEBI and cryptocurrencies has changed considerably in recent times. The Reserve Bank of India (RBI), the country’s central bank, published a circular in 2018 that forbade banks from offering services to people or companies engaged in cryptocurrency transactions. This was one of the biggest breakthroughs. This action severely damaged India’s bitcoin market, which resulted in a sharp drop in trade volumes and investment activity.

 

The Bitcoin community then filed a case against the RBI’s circular in the Indian Supreme Court, claiming that it was illegal and infringed upon their fundamental rights. The RBI’s ban on cryptocurrency trading was overturned by the Supreme Court in a historic ruling rendered in March 2020, finding that the central bank had not presented enough evidence to support such strict regulations. The cryptocurrency community applauded the court’s ruling, which was a major win for Indians interested in digital assets. SEBI has been aggressively investigating methods to regulate cryptocurrencies within the current legal framework in the wake of the Supreme Court’s decision. Although Indian law does not specifically recognize cryptocurrencies as securities, SEBI has made it clear that it is willing to regulate some parts of the cryptocurrency business, most notably initial coin offerings (ICOs) and cryptocurrency exchanges.

 

To encourage experimentation and innovation in the fintech sector, including blockchain-based solutions and digital currencies, SEBI suggested a regulatory sandbox framework in March 2020. The goal of the sandbox framework is to offer entrepreneurs and businesses a favourable setting in which to try innovative goods and services while being closely monitored by the government. Although cryptocurrency is not specifically included in the sandbox’s scope, SEBI has acknowledged the potential advantages of blockchain technology and digital assets. Simultaneously, SEBI has cautioned investors about the dangers of investing in cryptocurrencies, bringing up issues like market volatility, a lack of regulation, and the possibility of fraud. Before investing in digital assets, investors are advised by the regulator to proceed with caution and perform extensive due diligence. Furthermore, SEBI has stressed the significance of educating and making investors aware of the risks associated with trading cryptocurrencies.

 

Current scenario concerning Cryptocurrencies in the sub-continent:

As of right now, SEBI has not yet formalized full regulations governing the issuance and trading of cryptocurrencies in India, hence the regulatory environment surrounding them is still unclear. When navigating the complexity of the digital asset ecosystem, firms, regulators, and investors all face difficulties due to the lack of clear regulatory norms. 

 

SEBI’s recent developments with cryptocurrencies in India reflect the changing dynamics of regulation and innovation in the digital economy. Although the Supreme Court’s ruling to lift the prohibition on cryptocurrency trading was a major turning point for the sector, there are still obstacles to overcome before a strong regulatory framework that strikes a balance between investor protection and innovation can be established. The integrity and stability of the financial markets will be greatly dependent on SEBI’s capacity to shape the regulatory environment for cryptocurrencies as India continues to embrace digital change.

 

Analysis of the intersection between the SEBI and development of Cryptocurrencies in India:

 

Context of Regulatory Uncertainty:

In India, the regulatory environment surrounding cryptocurrencies has been marked by ambiguity and confusion as authorities have struggled to clarify their position on digital assets. Due to their decentralized networks and lack of centralized authority, cryptocurrencies like Bitcoin and Ethereum present particular difficulties for regulators around the globe. When the Reserve Bank of India (RBI) published a circular in April 2018 banning banks from offering services to people or companies engaging in cryptocurrency transactions, the regulatory landscape in India underwent a dramatic shift. This action caused a huge drop in trading volumes and investment activity, sending shockwaves through India’s cryptocurrency economy. Widespread condemnation from industry participants and legal challenges from the Bitcoin community followed the RBI’s prohibition.

 

Impact of Legal Battles: 

The Supreme Court of India became the site of judicial disputes between the bitcoin community and regulatory authorities. The RBI’s restriction on cryptocurrency trading was overturned by a landmark ruling rendered by the Supreme Court in March 2020. The RBI’s circular was declared unlawful by the court, which also found that there was insufficient evidence to support such severe actions. The Supreme Court’s ruling revitalized the cryptocurrency ecosystem and was hailed as a victory for Indians who were passionate about digital assets. The decision cleared the path for the comeback of bitcoin trading in India and restored investor confidence. It did, however, also draw attention to the necessity of uniformity and clarity in the legal frameworks governing cryptocurrencies.

 

SEBI’s Regulatory Stance: 

Following the ruling by the Supreme Court, SEBI has been entrusted with managing the intricate regulatory environment of cryptocurrencies. Although Indian law does not specifically recognize cryptocurrencies as securities, SEBI has stated that it is willing to regulate some parts of the cryptocurrency business, including initial coin offerings (ICOs) and cryptocurrency exchanges. SEBI has regulated cryptocurrencies in a cautious but proactive manner. Investors have been cautioned by the regulator about the hazards of investing in cryptocurrencies, which include price volatility, a lack of regulation, and the possibility of fraud. Before investing in digital assets, investors should proceed with prudence and complete due research, according to SEBI.

 

Challenges and Opportunities for the Cryptocurrency Ecosystem:

The ecosystem surrounding cryptocurrencies faces both opportunities and problems as a result of the latest developments between SEBI and cryptocurrencies in India. On the one hand, investor interest and confidence in digital assets have increased following the Supreme Court’s decision to relax the ban on cryptocurrency trading. The decision has created new opportunities for investment and innovation in the bitcoin market. Establishing a strong legal framework that strikes a balance between investor protection and innovation, however, still presents difficulties. The lack of well-defined regulatory policies creates uncertainty for entrepreneurs, investors, and regulators in equal measure, impeding the expansion and advancement of the cryptocurrency industry in India.

 

Adoption and investment are further hampered by regulatory uncertainty, which has raised questions about the validity and legality of Bitcoin transactions. Investor confidence in the cryptocurrency market is weakened by a lack of regulatory certainty, which exposes investors to risks like fraud, market manipulation, and security breaches. Despite these obstacles, India’s cryptocurrency scene offers a lot of chances for investment, innovation, and economic expansion. The underlying technology of cryptocurrencies, known as blockchain, has the potential to completely transform several sectors, including banking, government, healthcare, and supply chain management.

 

Additionally, as a decentralized substitute for established financial systems, cryptocurrencies give marginalized groups access to international markets and increased financial inclusion. India has the chance to establish itself as a leader in the global cryptocurrency sector by embracing innovation and creating a supportive legal framework.

 

The recent developments in India concerning cryptocurrencies and SEBI highlight the intricate relationship that exists in the digital asset ecosystem between innovation, investor protection, and regulation. The cryptocurrency community has been given some respite by the Supreme Court’s ruling, but there are still obstacles to overcome in creating uniform and transparent regulatory frameworks that support innovation while defending the interests of investors. The future of digital finance in India will be shaped by cooperation between policymakers, business players, and regulatory bodies as the nation navigates the rapidly changing cryptocurrency landscape.

 

Conclusion:

Under the jurisdiction of the Securities and Exchange Board of India (SEBI), the regulatory environment about shares linked to cryptocurrencies in India is marked by intricacy, unpredictability, and dynamic changes. The nation’s securities market regulator, SEBI, is a key player in creating the laws governing these cutting-edge financial products. During this analysis, we have looked at several aspects of SEBI’s regulatory position regarding shares linked to cryptocurrencies, including the impact of legal disputes, the regulatory approach taken by SEBI, and the opportunities and challenges facing India’s cryptocurrency ecosystem. Regulating cryptocurrency-linked shares is still unclear, even after the Supreme Court of India’s historic ruling in March 2020 reversed the Reserve Bank of India’s ban on cryptocurrency trading. Investors and businesses are in a state of uncertainty as SEBI has not yet formalized full regulations governing the issuing, trading, and oversight of shares related to cryptocurrencies. In addition to warning investors about the risks involved in cryptocurrency investing, SEBI has taken a cautious but proactive approach to regulating shares linked to cryptocurrencies. It has also proposed a regulatory sandbox framework to support innovation in the fintech sector, which includes blockchain-based solutions and digital currencies. The lack of explicit regulatory standards presents difficulties for market participants trying to navigate the cryptocurrency world, even while these measures indicate SEBI’s acknowledgement of the potential benefits of cryptocurrencies and blockchain technology. Moreover, cryptocurrency-linked shares provide more advantages and disadvantages than only regulatory concerns. The cryptocurrency market poses various risks for investors, including counterparty risks, volatility, and regulatory uncertainty. However, they should also consider the advantages of diversification and indirect exposure to the market. The regulatory environment in India about shares related to cryptocurrencies is still developing, mirroring the global discussion surrounding the regulation of digital assets. To create a regulatory framework that promotes innovation while defending investor interests and upholding market integrity, cooperation between regulatory bodies, industry players, and legislators will be crucial as India continues to negotiate the complexity of the digital asset ecosystem. It will take careful thought, participation, and adaptation to support the creation of a strong and inclusive financial ecosystem in the digital age for SEBI and cryptocurrency-linked shares in India.



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