As published on indianexpress.com, Tuesday 3 May, 2022.
A new rule will oblige cryptocurrency companies and exchanges to store Know Your Customer (KYC) information and financial transactions of all their customers for five years. This move is perceived to be a positive step towards compliance and user safety on crypto platforms. However, experts also concede that this development will significantly increase the compliance cost of cryptocurrency exchanges.
The country’s Computer Emergency Response Team (CERT-in), which is overseen by the Ministry of Electronics and Information Technology has issued a new set of rules stating that VPN providers and crypto exchanges must keep a wide range of data about their users. The new guidelines are set to take effect late in June.
Sathvik Vishwanathan, CEO of Unocoin cryptocurrency exchange told indianexpress.com that this is a positive step towards regulation. “We were already storing data of all of our users since the beginning, so this move doesn’t affect us,” he said, adding that “..the data would help prosecute tax evaders and any crimes happening using crypto.”
The new rule is only applicable to cryptocurrency exchanges that hold custody of the crypto wallets on behalf of their users. A custodial crypto wallet is one where your assets are held in custody for you. This means a third party will hold and manage your private keys on your behalf. In other words, you won’t have full control over your funds – nor the ability to sign transactions.
“No keys, no safety”, said Kashif Raza, a crypto and blockchain expert. “While users prefer custodian crypto exchanges because there are some advantages to using these kinds of exchanges, like being able to deposit and withdrawal fiat currency but they do not guarantee customers’ safety.”
However, Raza and others like him believe that complying with the new set of rules won’t be easy for exchanges. Ensuring that the data of the users such as their name, address, contact information and maintaining transaction record would require massive infrastructure.
“Exchanges would require to store data for five years and given the volume of trades, which occur on crypto exchanges it will drive up the costs because the new guideline says that all financial transaction data has to be stored. This means an extra burden for exchanges,” explained Sharat Chandra, Vice President of EarthID.
Another challenge would be in terms of storing the data locally in India, especially with foreign exchanges. Earlier, payment giant Mastercard was struggling with the issue of storing data of users locally.
“This development also signals that the government is in some way moving towards framing regulation. But what we also need is data storage guidelines first, and then only we can move to other aspects of regulation such as investor protection rights,” Chandra added.
Meanwhile, some experts are not positive about this development, and believe it will only spread fear among crypto traders. “The government could ban access to decentralised exchanges, and global exchanges too and without a VPN you can’t bypass them. It seems that the government is digging a grave for the crypto community,” said Hitesh Malviya, Founder of IBC Capital.