Synopsis
Local bourses as well as these HNIs believe their trades are kosher — drawing comfort from the fact that the foreign exchanges they are dealing with are registered with Financial Intelligence Unit (FIU). However, they may be unwittingly walking through a minefield of rules on the Foreign Exchange Management Act.
Mumbai : As Bitcoin surged toward $70,000 and Wall Street went long on Donald Trump, Indian crypto exchanges tapped offshore bourses for crypto futures trade which is catching on, while many HNIs reportedly made misleading declarations to banks to show their foreign crypto holdings as ‘security’ investments.
Local bourses as well as these HNIs believe their trades are kosher — drawing comfort from the fact that the foreign exchanges they are dealing with are registered with Financial Intelligence Unit (FIU). However, they may be unwittingly walking through a minefield of rules on the Foreign Exchange Management Act.
Crypto exchanges in India draw liquidity from overseas exchanges like Binance to support the futures market. In the absence of ready counterparties, they strike back-to-back deals with overseas bourses to facilitate futures trades which offer high leverage — several times more than what’s allowed in equity futures.
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They are least impacted by the high tax deducted at source which have pulled down spot crypto trade volumes.
Significantly, in carrying out the derivative transactions, the exchanges do not remit funds to place their margin on the overseas exchanges. Instead, they place USDT — better known as ‘stablecoin’ and is often taken as a proxy for the dollar — as a margin for the futures trade.
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Senior bankers and practitioners ET spoke to said that even though USDT or any virtual digital asset is not covered under FEMA, the exchanges are actually taking a derivative position without any underlier (like export or import) on a foreign platform.
Exchanges think they are within the contours of the law as long as the overseas exchanges are recognised by the FIU which reports directly to the Economic Intelligence Council (EIC) headed by the finance minister.
According to a senior exchange official, local bourses which meet FIU regularly, have kept the unit informed about the transactions.
However, FIU was formed to keep a track of suspicious transactions to curb money-laundering, and has little to do with FEMA.
“India imposes restrictions on the use of foreign exchange in overseas jurisdictions. Crypto derivative trading must adhere to these regulatory restrictions. In the absence of explicit regulations, careful consideration must be given to regulatory and tax compliance,” said Paras Savla, partner with tax and advisory firm KPB & Associates.
News reports of the FIU registration of a few foreign crypto bourses and their willingness to share information with Indian authorities have also led many individual investors to believe that they are free to open trading accounts with crypto exchanges abroad.
DECLARATION UNDER LRS
Some have transferred funds (using normal banking channels) to NRI relatives to open accounts in overseas exchanges because many banks in India insist on a declaration from the remitter using the liberalised remittance scheme (LRS) that they will not deploy the money in cryptos. A few banks forbid investment in even crypto-linked assets like exchange traded funds which invest in cryptos. Some HNIs sign on the declaration to open a savings account and subsequently draw the money to invest in cryptos.
“How do you stop this? The end-use monitoring of LRS money is often not possible. So, these individuals tell their banks here they would be investing in securities, but it would actually be in cryptos or crypto ETF. If the account is not with any foreign branch of an Indi an bank, it would be tough for the bank or Indian authorities to readily come to know of the crypto investment,” said a FEMA expert. Unlike shareholdings and bank accounts, crypto holder details are not yet shared under the information exchange pacts between various countries.
Anup P Shah, partner at Pravin P Shah & Co, said, “Investing in listed ETFs which may invest in cryptos is fine under the LRS. However, investing in cryptos and terming this as securities in the LRS declaration would be incorrect and a violation.”
Bitcoin prices have risen 12% in October and crypto ETFs have attracted big money ahead of the US elections, according to agency reports.
LRS permits an individual to remit up to $250,000 a year abroad to invest in securities, properties and deploy for other purposes. At present there are only two kinds of monitoring: first, banks want idle money to be brought back within six months; second, the Income Tax rules require the individual to declare the foreign assets in their annual I-T returns and pay tax on the gains.
