Cryptocurrency Exchange Law in India: Insights on Market Makers

There are no specific laws relating to market makers in relation to cryptocurrency exchanges in India.  There are certain guidelines that have been promulgated by SEBI (Securities and Exchange Board of India), however these are applicable only to Shares and inrelation to certain stock exchanges only. These regulations may be found here.

These SEBI Guidelines on Market Makers are not applicable to cryptocurrencies.

As per the SEBI Guidelines, following criteria have been laid down for Market Makers:

1. Market makers may be introduced in a phased way in the Stock Exchanges and to begin with, market making would be introduced only in the Stock Exchanges of Bombay, Calcutta, Delhi and Madras.

• Market makers as per SEBI are allowed only in Stock Exchanges.

• Each such market maker approved by the SEBI should make a market for a minimum of 5 scrips(Equity Shares). Initially, market making would be introduced only for those scrips which are not included in the BSE National Index. Each market maker shall be required to acquire at least 30,000 shares in each of the scrips. SEBI may vary the minimum number of shares required to be acquired based on the face value of the share, average delivery per settlement, floating stock of the company etc.
  • These Guidelines apply to equity shares only.

Reference may also be made to RBI (Reserve Bank of India) (Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021) available at https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12163. These directions also do not have any applicability to cryptocurrency exchanges, as these are applicable to OTC Derivatives.

As per the above Master Direction,

• A Market-makers shall deal only in derivative products permitted in terms of the Governing Directions.
• Market-makers may deal in derivative products which have cash instrument(s) and/or permitted derivative(s) as components.
• Market-makers shall not deal in derivative products containing a derivative instrument as underlying unless specifically permitted in terms of the Governing Directions.
• Market-makers shall not deal in derivative products, either directly or on a back-to-back basis, which they cannot price independently.

Under this Direction, ‘Market-maker’ means an entity which provides prices to users and other market-makers. ( Explanation: Authorised Persons, authorised as such under Section 10(1) of the Foreign Exchange Management Act, 1999 (42 of 1999), permitted to undertake foreign exchange derivative transactions with users and other Authorised Persons, shall be treated as market-makers for such transactions.) The term “Derivative” means (iv) ‘Derivative’ shall have the same meaning as assigned to it in Section 45U(a) of the Act.

Section 45U(a) of the RBI Act defines “Derivative” as under:

(a) “derivative” means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called “underlying”), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time.

Now, coming to the cryptocurrencies, these have been broadly defined in the year 2022 under the Income Tax Act as under:

Section 2 sub-section (47A) “virtual digital asset” means–

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

Explanation.- For the purposes of this clause,–

(a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;

(b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).]

https://www.indiabudget.gov.in/doc/memo.pdf and  https://www.indiabudget.gov.in/doc/Finance_Bill.pdf )

Cryptocurrencies have been for the first time dealt with under any Indian law, by way of an amendment in the Income Tax Act, in the year 2022, and the cryptocurrencies have been defined to fall into the category of virtual digital assets. As of now, except for Section 2(47A) of the Income Tax Act, cryptocurrencies have not been dealt with or defined under any other law.  The SEBI Guidelines and RBI Master Direction with respect to MARKET MAKER do not deal with cryptocurrencies.  There is no law in India dealing with MARKET MAKER of cryptocurrencies and these are still unregulated.

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