Author: Apeksha Saraf and LLB Hons, University of Leeds; Incoming LLM, University of Law
To the Point
In recent years, the global cryptocurrency market has seen an extraordinary growth in regulations, with countries struggling to create all-encompassing frameworks that strike a balance between innovation, consumer protection, and financial stability. Two important regulatory developments are compared in this study: the Financial Services and Markets Act 2023 (FSMA 2023) of the United Kingdom and the developing digital currency framework in India. Both jurisdictions give important insights on the direction of digital asset governance, representing different ways to regulating cryptocurrencies in business transactions.
The difficult struggle between technology and bureaucracy is demonstrated by India’s 2024 cryptocurrency policy, which imposes strict market access, hefty tariffs, and innovation-driven initiatives to promote market standardisation. On the other hand, the UK’s FSMA 2023 significantly alters the financial services system by allowing the existing European Union financial services law to be repealed and replaced with UK-specific standards.
In order to comprehend how two significant economies with disparate legal traditions, common law regimes but different approaches to commercial law, are handling the incorporation of cryptocurrencies into regular business transactions, this comparative research is important. With high taxes and severe compliance standards, India takes a more restrictive stance, whilst the UK seeks a more balanced regulatory environment with the goal of becoming a global hub for crypto assets.
Abstract
This article looks at the different methods that the UK and India have taken to regulating cryptocurrencies in business transactions. This article highlights key distinctions in regulatory theory, implementation tactics, and business ramifications between the UK’s Financial Services and Markets Act 2023 and India’s developing digital currency environment. According to the research, the UK seeks a more open framework intended to draw bitcoin businesses while maintaining consumer protection, whereas India takes a stricter approach that emphasises taxation and compliance. The results indicate that for cryptocurrencies to be successfully incorporated into commercial law, regulatory clarity, fair taxation, and balanced innovation policies are essential. Policymakers, attorneys, and business organisations can use the comparative study’s insights to navigate the changing regulatory environment surrounding cryptocurrencies.
Use of Legal Jargon
Complex jurisprudential ideas that go against conventional ideas of legal currency, negotiable documents, and commercial paper are involved in the regulatory regulation of cryptocurrencies in business transactions. The legislative structure regulating the use of digital assets as economic instruments in India is lacking because of the Reserve Bank of India Act of 1934 and the Coinage Act of 2011’s lack of specific statutory recognition.
When considering financial authorities’ authority to oversee cryptocurrencies without a clear parliamentary mandate, the ultra vires concept becomes particularly crucial. In India, de facto recognition is achieved through taxation under Section 115BBH of the Income Tax Act, 1961, which levies a flat 30% tax on cryptocurrency gains. This essentially treats cryptocurrencies as assets rather than currency for business purposes.
By introducing the idea of “crypto asset activities” as part of regulated actions under the Financial Services and Markets Act 2000, the FSMA 2023 brings digital assets under the supervision of the Financial Conduct Authority (FCA) in accordance with English commercial law. Increased requirements for disclosure and conduct of business standards designed especially for crypto asset transactions alter the caveat emptor principle.
In business transactions, the way cryptocurrencies are treated is greatly influenced by their legal classification as securities, commodities, or sui generis assets. The regulatory framework in India takes a taxonomy-neutral stance, emphasising the functional features of transactions above the fundamental characteristics of digital assets. The UK’s strategy, in contrast, entails thorough classification, specifically differentiating between stable coins, security tokens, and utility tokens.
The Proof
Indian Regulatory Framework Evolution
Over the past few years, India’s cryptocurrency regulations have changed significantly, marked by a number of important advancements. The RBI’s early antipathy towards cryptocurrencies marked the beginning of the regulatory process, which culminated in the 2018 circular that essentially prohibited banks from doing business with virtual currency exchanges. But this circular was overturned by the Supreme Court’s historic ruling in Internet and Mobile Association of India v. Reserve Bank of India (2020), opening the door for additional regulatory involvement.
The current framework uses a multifaceted strategy to function:
Tax Regime: Virtual digital assets (VDAs) are subject to comprehensive taxation laws introduced by the Finance Act 2022, which impose a 30% tax on gains and 1% TDS on transactions above ₹10,000. This is a tacit acknowledgement of the validity of cryptocurrencies in business dealings.
Anti-Money Laundering Compliance: India’s cryptocurrency laws are changing, and crypto AML solutions successfully guarantee adherence to the ever-changing KYC regulatory environment. Registration is now required for all bitcoin exchanges and service providers by the Financial Intelligence Unit (FIU).
Proposed Digital Rupee: India’s effort to embrace digital currency technology while preserving monetary sovereignty is embodied in the RBI’s Central Bank Digital Currency (CBDC) initiative. The purpose of the Digital Rupee is to serve as a state-regulated substitute for cryptocurrencies in business dealings.
UK’s FSMA 2023 Implementation
In order to include crypto assets under the current financial services regulatory framework, the UK passed the Financial Services and Markets Act 2023, which went into effect on August 29, 2023. This thorough strategy takes care of a number of important issues:
Extension of the Regulatory Perimeter: The Act adds crypto asset management and deal-making to the list of regulated activities, guaranteeing that commercial cryptocurrency trades are under the FCA’s jurisdiction.
Regulation of Stable coin: Firms that issue, hold, or facilitate payments in fiat-backed stable coins will be greatly impacted by Phase 1 regulation, which will provide the groundwork for a wider integration of cryptocurrencies in business dealings.
Financial Promotions Regime: The FCA and the government have voiced worry about developments in the cryptocurrency industry, including the downfall of FTX and rising price volatility. As a result, they have established strict financial promotions regulations for marketing connected to cryptocurrencies.
Case Laws
Internet and Mobile Association of India v. Reserve Bank of India (2020) 3 SCC 1
India’s bitcoin regulatory environment was drastically altered by the Supreme Court’s ruling in this historic case. Because it went against the proportionality principle, the Court ruled that the RBI’s 2018 circular banning banks from offering services to cryptocurrency exchanges was unconstitutional. The ruling stated that without appropriate legislative support, regulatory actions cannot be a complete ban and must be commensurate with the risk that has been assessed.
Importance of Commercial Transactions: This ruling made bitcoin trading legitimate and established that, under the proper rules, businesses can use banking channels to transact in cryptocurrencies.
Kik Interactive Inc. v. Securities and Exchange Commission (2020) (US Precedent – Relevant for Comparative Analysis)
Despite not being an Indian or UK case, this US precedent has a big impact on how cryptocurrencies are regulated globally, including how India and the UK handle it. In order to determine when digital assets qualify as securities, the court created the “Howey Test” applicability to cryptocurrency offerings.
Implications for Commercial Law: The ruling affects how authorities in India and the UK handle token sales and initial coin offerings (ICOs) in business settings, especially with relation to disclosure regulations and investor protection strategies.
R v. Montila & Others [2004] UKHL 50 (UK)
Although it came before the widespread use of cryptocurrencies, this House of Lords ruling established significant guidelines for what constitutes “property” that later shaped how UK courts viewed digital assets. For legal purposes, the case made it clear that intangible assets might be considered property.
Relevance to Cryptocurrency: The ruling supports the integration of cryptocurrencies in the current frameworks of commercial law by establishing fundamental authority for treating them as property in business transactions.
AA v. Persons Unknown & Ors [2019] EWHC 3556 (Comm)
One of the first UK court rulings to exclusively address bitcoin in business disputes was rendered by the English Commercial Court. The court treated the stolen Bitcoin as property that could be kept in trust and issued a proprietary injunction over it.
Impact on Commercial Transactions: This decision improves legal certainty for commercial bitcoin transactions by establishing that cryptocurrencies may be subject to commercial remedies, such as freezing orders and proprietary claims.
Conclusion
A comparison of the FSMA 2023 in the UK and the digital currency framework in India shows significant disparities in implementation techniques and regulatory philosophies. High taxes and strict compliance standards are hallmarks of India’s cautious strategy, which puts financial stability and revenue generation ahead of market expansion. But strict compliance standards and high taxes have slowed market activity, which has caused some businesses and investors to relocate overseas.
The FSMA 2023 in the UK, on the other hand, is a more complex strategy that aims to strike a compromise between consumer protection and innovation. HM Treasury outlined the UK’s aspirations to become a crypto asset infrastructure hub in 2022, reflecting the UK Government’s belief that the technology underlying cryptocurrency may benefit the country.
A few crucial factors must be taken into account in order to move forward:
Regulatory Harmonisation: To avoid regulatory arbitrage and guarantee uniform handling of cross-border cryptocurrency transactions, both countries should strive for more international coordination.
Proportionate Regulation: Legitimate business use cases and innovation must not be hindered by regulatory frameworks that are out of proportion to known concerns.
Legal Certainty: Investment and business confidence depend on precise legal definitions and regulation of cryptocurrencies in the context of commercial law.
Technological Neutrality: To ensure future adaptation, regulations should concentrate on functional elements rather than particular technologies.
A pivotal point in the development of commercial law is represented by the rise of cryptocurrency laws in business transactions. Developing frameworks that safeguard consumers, uphold financial stability, and promote innovation and economic expansion will be essential to success. Other jurisdictions looking to incorporate cryptocurrencies into their commercial law systems can learn a lot from the divergent strategies of the UK and India.
FAQs
What are the ways that the UK and India handle the taxes of cryptocurrencies in business transactions?
India treats cryptocurrencies as taxable assets and levies a flat 30% tax on cryptocurrency gains and 1% TDS on transactions over ₹10,000. The UK takes a more complex approach that takes into account various forms of commercial cryptocurrency activity by applying capital gains tax rates (10–28%) with more favourable treatment for enterprises.
Are cryptocurrencies accepted as forms of payment in both jurisdictions’ commercial contracts?
Cryptocurrencies are not specifically accepted as legal tender in either jurisdiction. Both, however, permit the use of them as contract consideration in business contracts, provided that the corresponding regulatory conditions are met. For such agreements, the UK framework offers more clarity.
Which regulations are different for bitcoin exchanges in India and the UK?
Indian exchanges are required to maintain thorough KYC data, register with the FIU, and adhere to TDS regulations. In accordance with FSMA 2023’s precise conduct of business standards, UK exchanges must achieve capital adequacy requirements and obtain FCA authorisation.
How do both governments handle commercial clients’ custody of cryptocurrencies?
India uses generic fiduciary principles instead of having specialised custody laws. Comprehensive custody regulations, such as safeguarding guidelines, segregation duties, and professional liability insurance requirements, are introduced by the UK’s FSMA 2023.
What are the international ramifications for companies that provide cryptocurrency services in both countries?
Companies must concurrently adhere to both regulatory frameworks, necessitating separate compliance systems, dual licensing, and careful tax structuring. Higher compliance standards, which may surpass Indian regulations, are frequently required by the UK’s more extensive framework.
What are the differences between the two jurisdictions’ approaches to consumer protection?
India has few particular consumer protection laws for bitcoin users and instead concentrates on AML compliance and tax collection. Through limitations on financial incentives, cooling-off periods, and rigorous disclosure rules, the UK carries out comprehensive consumer protection.
Sources
https://www.gate.com/learn/articles/overview-of-india-s-cryptocurrency-policy-in-2024/5729
https://www.complycube.com/en/cryptocurrency-regulation-in-india-in-2024/
https://www.impriindia.com/insights/crypto-india-regulatory-framework/
https://www.cooley.com/services/practice/european-tech-regulation/fintech-and-cryptocurrency/the-financial-services-and-markets-act-2023
https://www.twobirds.com/en/trending-topics/digital-regulations/cryptoasset-regulation
https://www.akingump.com/en/insights/alerts/uk-enacts-regulation-of-crypto
https://www.sidley.com/en/insights/newsupdates/2023/11/uk-confirms-regulatory-regime-for-cryptoassets
https://www.gov.uk/government/publications/regulatory-regime-for-cryptoassets-regulated-activities-draft-si-and-policy-note/future-financial-services-regulatory-regime-for-cryptoassets-regulated-activities-policy-note-accessible
