Crypto Is Now Legal In India and South Korea. What Does It Mean?

News and Analysis

On March 4th, the Supreme Court of India ruled against the Reserve Bank of India’s decision to ban the country’s banks from dealing with digital currencies. The next day, on March 5th, the South Korean authorities have effectively legalized cryptocurrencies.

We’ve looked into the details of these two developments to figure out what awaits the crypto-industry in these jurisdictions.

India Before

In April 2018, RBI issued a directive prohibiting the financial institutions under its rule from dealing with cryptocurrencies. In the central bank’s opinion, not only do cryptocurrencies undermine the FATF’s AML standards and help finance terrorism, but they are also a threat to the banking system integrity. The decision came into effect in July 2018.

Notably, by that time, the Indian government has been monitoring the activities of cryptocurrency exchanges and wealthy Bitcoin-entrepreneurs for several months. They were looking for evidence of tax evasion or illegal financial activities. Transactions tied to crypto-exchanges were getting blocked even before the directive was issued.

The local community was seriously affected by the new rules. The country’s leading exchanges had to either limit their operations considerably or move to other jurisdictions. Zebpay. then-largest trading platform in India did the latter. In September 2018, the company announced the closure of trading. Several weeks later, Zebpay announced that they will open a new office in Malta and stop servicing India residents.

Zebpay was important for India. At one time, the platform was servicing about a half of all Bitcoin users in the country, which was about 5–6 million at the time, and its trading app was downloaded 3 million times.

Unicoin was another important exchange. Not long before the RBI’s decision, Unicoin launched a trading platform supporting Bitcoin, Bitcoin Cash, XRP, Ethereum, Litecoin, and Stellar. Back in 2018, they were trying to circumvent the ban by launching their own terminal that allowed users to deposit fiat directly. It didn’t last long, though. In less than two weeks, the company’s co-founder was arrested and his laptops, phone, credit cards, and cash confiscated. The police stated that the platform had no right to operate a terminal without proper licenses.

The local community has been engaged in legal fighting with the RBI’s directive from almost the very beginning. They’ve launched a petition stating that India, as a country known for its talented developers, should be among the forerunners of the blockchain revolution and the authorities should help the industry grow. The document also highlighted the potential of cryptocurrencies to strengthen the local economy. The petition was signed by 20 thousand people in 24 hours.

Local courts started getting appeals asking to revoke the RBI’s directive. In early May 2018, the Supreme Court decided to combine all the appeals into one and stop taking them from thereon.

In July 2018, two Supreme Court hearings regarding the directive took place. The ruling survived both. As was explained, there weren’t enough commentaries from the participants of the procedure.

Historic Decision

The third hearing was being delayed for all sorts of reasons, but was to be the one that actually mattered. On March 4th, the Supreme Court canceled the directive.

The court’s decision was based on the argument about the “disproportionate” nature of the directive. The authors of the lawsuit noted that the central bank was unable to prove that cryptocurrencies are a threat to banks. The Supreme Court has also agreed that the directive was passed without clear cryptocurrency regulations in place.

Nasscom, an Indian nonprofit association of crypto-companies, welcomed the Supreme Court’s decision, noting that “banning tech is not the solution” and that “a risk based framework must be developed to regulate and monitor cryptocurrencies and tokens.”

WazirX, a local crypto-exchange, hailed the victory of #IndiaWantsCrypto movement. The very next day after the decision, the platform added rupee deposits.

Their competitors CoinDCX was quick as well. According to the company’s representatives, bank payments were integrated in 6 hours after the court ruling.

On March 5th, Unocoin exchange resumed accepting fiat deposits.

On March 9th, Zebpay returned to the Indian market.

Kraken exchange announced that it’s “recommitting to the Indian market” the same day.

The removal of the RBI’s ban may have a positive effect on the crypto-industry and the adjacent sectors, including fintech.

In addition, the country’s payments market can now be targeted more aggressively by Ripple. Back in 2018, the company’s vice-president Asheesh Birla mentioned that India is important as Ripple’s “inroad to the world market.”

The fact that a U.S.-based software company HashCash Consultants is going to invest $10 million into the sector is another early sign of recovery.

“This is a historic judgment by Supreme Court that puts India back in the global crypto map. The reinstating of cryptocurrency activities has opened up an entire geography, for fresh collaborations and ventures for the global players, forecasting prospects for the crypto industry and the Indian economy at large,”  said Raj Chowdhury, CEO of HashCash Consultants.

The Catch

While the Indian crypto-community may feel optimistic, experts point out certain caveats, which can be found in the verdict of the Supreme Court.

Tanvi Ratna, the founder and CEO of a consulting firm called Policy 4.0, notes that the final text defines cryptocurrencies as a side product of blockchain technology. She believes that the authorities may separate digital assets themselves and the underlying technology into distinct categories. Given the negative attitude the local authorities have towards crypto, there may be significant risks.

In summer 2019, an Indian governmental panel headed by finance secretary Subhash Chandra Garg proposed a set of harsh measures, including a fine of up to $3.63 million and up to 10 years of jail for anyone who “mines, generates, holds, sells, transfers or issues cryptocurrency.”

While such a hardline approach may not be supported, the legal fight will likely be hard, as RBI seeks to appeal the Supreme Court decision.

What About South Korea?

South Korean authorities have been working on legalizing crypto for a long time. It takes a while largely because of the alleged money laundering cases involving local exchanges like Bithumb, as well as hacks and theft of users’ assets.

In November 2019, the National Assembly’s national policy committee passed a bill categorizing virtual currencies as digital assets. The bill implied that the companies dealing with crypto should observe the FATF AML rules and register with the Financial Services Commission (FSC).

On March 5th, the National Assembly passed amendments to said bill. The new rules, which will come into effect in 2021, are effectively legalizing cryptocurrencies and will allow, among other things, legal trading on crypto-exchanges.

According to the new rules, Bitcoin-exchanges, token issuers, and other industry players will have to:

  • observe all the rules of financial reporting,
  • have a real-name verification partnership with an approved Korean bank,
  • obtain an information security management system (ISMS) certification.

It is also noted that the companies that refuse to inform the authorities about suspicious activities, don’t have ISMS certification, or manage accounts without proper identification won’t be certified. Such companies will also be fined $50 million won (about $41,000) and their board of directors will face up to 5 years in jails.

Local media warned that the new rules mean serious restructuring for the country’s blockchain industry.

In September 2016, there were about 70 cryptocurrency trading platforms in South Korea. Most of them couldn’t get the needed partnerships with banks. The ISMS certification granted by the Korea Internet Security Agency (KISA) can also be prohibitively costly for many companies. The new rules may, in fact, reduce the number of crypto-exchanges in Korea to half a dozen by 2021.

Investors are also confused. Some of them welcomed the new rules and the “new era of coins” highlighting the fact that crypto isn’t considered a form of gambling anymore. Others noted that the government plan to classify income from cryptocurrency trading as “other income,” together with lottery or prize-winning, nullifies the effort. According to the existing law, other income is subject to a 20% tax.

Still, with the new legislation, South Korea has become one of the countries to establish a relatively clear legal framework for cryptocurrencies. Any rule has its pros and cons and there will always be people to criticize the actions of the authorities. Importantly, this country is now extremely close to the very regulation heralded for years. Only time can tell if it will do good for the industry.

Written by Andrew Asmakov

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