Problem Description

Fostering a Sustainable Ecosystem:

Strategies for Supporting Digital Asset Startups in India
-Preferably for the Y23 batch

Recruitment task to be performed:

Instructions:

● Deadline to submit the task: 18 June EOD

Form Link: https://forms.gle/USWFVNtBnMU6UYgz5
● Choose any one of the case studies and present your work in a clear and
concise manner as a single document.

Case Study 01: Digital Assets Based on Lending.

Background

The lending industry in India is undergoing a significant transformation with the

emergence of digital assets as a new collateral class. Digital assets, such as
cryptocurrencies, tokens, and other forms of digital representations of value, are
increasingly being recognized as viable collateral for lending. This shift has opened
up new opportunities for borrowers, lenders, and financial institutions to participate
in the lending market.

In India, the traditional lending landscape has been dominated by banks and
non-banking financial companies (NBFCs), which have primarily relied on
traditional forms of collateral such as real estate, gold, and other physical assets.
However, with the growth of digital assets, new players are entering the market,
offering innovative lending solutions that leverage digital assets as collateral.
The Indian government has also taken steps to regulate the digital asset space, with
the Reserve Bank of India (RBI) issuing guidelines for digital lending platforms. The
Securities and Exchange Board of India (SEBI) has also introduced initial coin
offerings (ICOs) and digital assets regulations.

● Task: Analyze the potential of digital asset-based lending in India, including

the opportunities, challenges, and regulatory requirements.
● Questions to answer:
1. How can digital assets be used as collateral for lending in India?
2. What are the regulatory requirements for digital assets-based lending in
India?

Case Study 02: Tax Incentives for Digital Assets Startups

Background

The digital assets industry has been growing rapidly in India, with many startups
emerging in the space. To encourage the growth of this industry, the Indian
government has introduced various tax incentives to support digital assets startups.
These incentives aim to foster innovation, job creation, and economic growth in the
sector.

Tax incentives can be an effective way to promote entrepreneurship and innovation

in the digital assets space. By reducing the tax burden on startups, the government
can help them conserve cash, invest in research and development, and scale their
operations more quickly. This, in turn, can lead to job creation, increased economic
activity, and the development of new technologies and services.

However, the effectiveness of tax incentives in achieving these goals is not always
clear-cut. Some argue that tax incentives can create unintended consequences, such
as encouraging tax avoidance or unequally benefiting certain companies or
industries. Others argue that tax incentives may not be targeted effectively, leading to
wasteful spending or supporting companies that would have succeeded regardless of
the incentives.

● Task: Evaluate the effectiveness of tax incentives for digital assets startups in
India, including the impact on innovation, job creation, and economic growth.
● Questions to answer:
1. What are the benefits and drawbacks of tax incentives for digital assets
startups in India?
2. How can tax incentives be designed to encourage innovation and job
creation in the digital assets sector?

Case Study 03: Regulatory Framework for Cryptocurrencies

Background

The cryptocurrency market has witnessed exponential growth globally, with India
emerging as a significant player. Indian investors have increasingly turned to
cryptocurrencies like Bitcoin, Ethereum, and others, resulting in substantial trading
volumes. Despite this growth, the absence of a clear regulatory framework has raised
concerns about investor protection, money laundering, and terrorist financing.

The Reserve Bank of India (RBI) has historically adopted a cautious stance towards
cryptocurrencies. In 2018, the RBI imposed a ban on regulated entities from dealing
with cryptocurrencies due to the lack of a regulatory framework. However, this ban
was overturned by the Supreme Court of India in March 2020, allowing the industry
to operate in a regulatory gray area (Unocoin Blog) (Indias Magazine).

● Task: Develop a comprehensive regulatory framework for cryptocurrencies in

India, including licensing requirements, AML/CFT regulations, and tax
implications.
● Questions to answer:
1. How can India balance the need for regulation with the need for innovation
in the cryptocurrency space?
2. What are the key regulatory risks and how can they be mitigated?

Resources:

For Case Study 01:

● YouTube— Intro to DeFi

● Articles — Decentralized Finance by Coin Desk

For Case Study 02:

● Article — Crypto Taxation in India by Coin Desk

For Case Study 03:

● Article— Forbes Article on Cryptocurrency Regulation in India.

● About AML/CFT here

Appendix :

Regulatory Landscape
Legal Status and Recent Developments

Cryptocurrencies are not considered legal tender in India. Although the 2020
Supreme Court ruling lifted the RBI's ban, the regulatory environment remains
ambiguous. In January 2021, the Indian government proposed the Cryptocurrency
and Regulation of Official Digital Currency Bill, 2021, which aims to prohibit
private cryptocurrencies while promoting a digital currency issued by the RBI
(Unocoin Blog) (Indias Magazine).

The government’s stance has evolved, with new regulations being introduced to
address various aspects of the cryptocurrency ecosystem. These include taxation
policies and measures to combat money laundering and terrorist financing (KYC
Hub) (GLI).

Taxation Policies

In the Union Budget 2022-23, the Indian government introduced a 30% tax on
income from the transfer of virtual digital assets (VDAs) and a 1% tax deducted at
source (TDS) on every transaction involving VDAs. This taxation framework
acknowledges cryptocurrencies and aims to bring them within the tax net, ensuring
that gains from these transactions are taxed similarly to other financial instruments
(KYC Hub) (GLI).

Anti-Money Laundering (AML) and Combating the Financing of Terrorism

(CFT)

The Indian government is working on regulations that include stringent AML and
CFT measures. These regulations are expected to mandate know-your-customer
(KYC) requirements for cryptocurrency exchanges to prevent the use of
cryptocurrencies for illegal activities (Unocoin Blog) (GLI).

Future Regulatory Developments

India is updating its legal framework to support digital innovation. Draft policies like
the National Data Governance Framework Policy and the Digital Personal Data
Protection Act, 2023, are being introduced to modernize data handling and
cybersecurity. These policies are expected to have a positive impact on the
blockchain and cryptocurrency sectors (GLI).

Additionally, the proposed Digital India Act aims to harmonize existing laws and
regulate emerging technologies, including blockchain and Web 3.0. This legislative
overhaul is anticipated to foster a supportive environment for digital-first businesses
in India (GLI).

Industry and Community Response

The Indian cryptocurrency community has expressed mixed reactions to the
proposed regulations. While there are concerns that stringent regulations might stifle
innovation and hinder the growth of the digital economy, there is also hope that a
clear regulatory framework will build trust, attract investment, and protect investors
(Unocoin Blog) (India’s Magazine).

States like Telangana have launched initiatives such as the Web3 Sandbox to
promote blockchain innovation, indicating a progressive approach toward embracing
new technologies while managing associated risks (KYC Hub).