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crypto ban: India’s new cryptocurrency law set to red-flag chit fund, MLM business models

India is set to red flag several investment schemes launched by individuals and cryptocurrency exchanges that are similar to chit funds, multi-level marketing (MLM) and systematic investment plans (SIP), as it seeks to build a robust regulatory framework to protect vulnerable rural populations buying risky crypto assets.

Regulators including the Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) have raised concerns before a parliamentary panel about how some individual investors are collecting money in small towns – with business models resembling those of chit funds – for investing in crypto assets.

RBI has pointed out how some Indians have even started accepting cryptocurrency payments for export services, thus posing a broader systemic risk.

“It is observed that some individuals are going to small towns and raising money from people, mainly in cash, with the promise of great returns in cryptocurrencies,” said a person familiar with the representations to central lawmakers. “This is exactly like chit funds, but without any framework or regulations.”

Regulators have reportedly flagged instances in the hinterland, particularly in Uttar Pradesh and Bihar, where collective investment schemes or chit funds have been floated to pool money for alleged investments in cryptocurrencies. Crypto exchanges and related associations have also made representations to the panel of central lawmakers. Officials at Sebi and RBI could not immediately be reached for comments.


Besides chit funds, even MLM-like schemes are being promoted by some unregulated entities, warn insiders. “In India, a lot of scams are driven by smart contracts – anyone can launch their own coin and start raising money,” said Siddharth Sogani, founder, CREBACO, a cryptocurrency research firm.

Scam Schemes

“There is one scam every week in India where fraudsters are trying to do a multi-level-marketing or collective investment scheme, which promises astronomical returns to people.”

CREBACO had red-flagged a “fake cryptocurrency exchange” that announced hiring plans. The exchange was only collecting money and was a “scam,” said insiders. In another instance, a small company started collecting money from small investors in Uttar Pradesh with the promise of doubling their invested funds in a year. The company claimed it would invest the pooled money in cryptocurrencies. “There were many other instances where it was found that individuals are just taking advantage of the cryptocurrency craze and regulators need to protect the rights of small investors,” said a person aware of developments.

Mitigating Risk

RBI has, in the past, said cryptocurrency poses a systemic risk to India’s economy. Most exchanges have distanced themselves from individuals collecting money and investing in crypto assets with a business model not dissimilar to those at chit funds.

Another person close to the developments said concerns were also raised by Sebi on the nomenclature used by exchanges. New regulations could spell out what exchanges can say and what they cannot. “We have to draw a line at what we can say and what we can’t. Maybe, when you say ‘investment,’ it may not be fine; calling it SIP may not be fine too, but as of now, we don’t know what terms to use,” said Sathvik Vishwanath, co-founder and chief executive of Unocoin, a cryptocurrency exchange.

“These (terms) are used haphazardly by different companies for different things. Currently, exchanges have to explain some concepts to a common man who doesn’t have an idea what we are talking about. So, sometimes we have to come up with something to compare it with,” he added.

Cryptocurrency exchanges and associations have even raised concerns about how some fly-by-night crypto exchanges have mushroomed in the past few months, from which the government should differentiate genuine exchanges.

Apart from that, the government could also put out some framework for how money can be raised through an Initial Coin Offering (ICO), which is the cryptocurrency equivalent of an IPO. “Sebi should regulate ICOs in India if these instruments are allowed,” said Sogani of CREBACO.

Regulation Jitters

Investors are wary after New Delhi decided to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, in the winter session of Parliament. Both investors and venture capitalists sounded cautious after the Lok Sabha bulletin was published last week.

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