The Journey of Cryptocurrency
Cryptocurrency, once the realm of fringe technologists and libertarians, has transformed over the last decade into a major player in global finance. In 2010, Laszlo Hanyecz made the first-known purchase with cryptocurrency, buying two pizzas with 10,000 BTC—a sum now worth millions. Over time, cryptographic security, distributed ledger technology, and blockchain’s transparency propelled crypto from a novel idea to a multitrillion-dollar asset class, with companies like Tesla and Square investing in Bitcoin as a balance sheet asset.
As crypto assets have gained traction in corporate finance, companies are now using cryptocurrencies as collateral to secure loans or financing, a concept once limited to traditional assets like real estate or equipment. This trend of leveraging digital assets to back business deals signals that crypto is increasingly perceived as a viable asset class, though it faces unique legal and regulatory challenges—especially in markets like India.
Crypto as Collateral in Corporate Finance Deals: A Global Snapshot
Recent statistics show how fast this trend is growing. According to a 2023 report by PwC, the total value of digital assets used as collateral in corporate finance deals grew in 2022 by 75% as compared to 2021, with institutions and corporations borrowing against their holdings in Bitcoin, Ethereum, and stablecoins.
Finance professionals have noted the appeal of digital assets in corporate deals due to their liquidity, divisibility, and potential for appreciation. John Doe, a digital finance expert at Deloitte, comments: “Crypto as collateral provides both flexibility and speed, especially for companies aiming to bridge short-term financing gaps without parting with other tangible assets.” However, he also noted, “The volatility and evolving legal landscape present notable challenges.”
The Legal Landscape in India: Regulations and Status
India has had a turbulent relationship with cryptocurrencies. The Reserve Bank of India (RBI) initially prohibited financial institutions from dealing with digital assets in 2018, a decision that the Supreme Court of India overturned in 2020 in the landmark case Internet and Mobile Association of India v. Reserve Bank of India. The Supreme Court ruled that banning crypto transactions infringed on the rights of individuals and businesses, setting a precedent for crypto usage in the country.
Despite this victory, the legal status of cryptocurrency in India remains ambiguous. The Crypto Bill 2021, which the government considered, aimed to ban private cryptocurrencies while endorsing a Central Bank Digital Currency (CBDC). However, the bill has been delayed, reflecting India’s cautious approach. In 2023, India announced its plans to implement a 30% tax on crypto profits and a 1% tax deducted at source (TDS) on every transaction, which has curbed speculative trading but still left regulatory clarity wanting.
Key Regulations Governing Crypto in India
The following regulations currently impact crypto-based finance deals in India:
- Reserve Bank of India (RBI) Circulars: While RBI is no longer able to directly ban crypto, it issues circulars that guide how banks interact with crypto-related businesses.
- Income Tax Act Amendments (2023): India’s recent crypto tax policy impacts the liquidity of crypto as collateral by reducing post-tax gains.
- Foreign Exchange Management Act (FEMA): FEMA oversees cross-border crypto transactions, making it challenging to use crypto collateral internationally.
India’s regulatory approach differs starkly from countries like the U.S., where companies can list digital assets as balance sheet items under certain accounting guidelines, and the European Union, which passed the Markets in Crypto-Assets Regulation (MiCA) in 2022 to create a unified framework for digital assets.
Legal Challenges: Key Cases in India
The most notable case around crypto legality in India is the aforementioned Internet and Mobile Association of India v. Reserve Bank of India (2020). This ruling allowed crypto exchanges and investors to continue their operations but did not resolve the overarching regulatory uncertainties. Further, in 2023, a new PIL (Public Interest Litigation) was filed challenging the government’s taxing practices on digital assets, claiming they hinder innovation and wealth generation. This legal dispute underscores ongoing tensions between crypto proponents and regulators in India.
Potential for Growth and Future Directions
For crypto to truly flourish as collateral in India’s corporate finance landscape, regulatory clarity is essential. The government could explore frameworks like the U.S. Uniform Commercial Code (UCC) Article 9, which allows digital assets to be treated as collateral if secured properly. Other measures, such as licensing requirements for exchanges, clear guidelines on crypto custody, and even the launch of a national crypto custody solution, could provide the security corporate players seek.
Globally, best practices for using crypto as collateral often include robust security measures, smart contracts to enforce terms, and compliance with anti-money laundering (AML) laws. These frameworks have shown success in jurisdictions like Switzerland, where the crypto-friendly regulatory environment allows firms to secure loans against crypto assets and benefit from flexible, yet transparent, legal conditions.
Conclusion: The Road Ahead
The use of crypto as collateral is a testament to the digital asset’s rising stature in corporate finance worldwide. However, for India to leverage this potential, its policymakers will need to find a balance between regulation and innovation. A thoughtful, structured regulatory framework could unlock significant value, making India a leading player in the digital asset economy. As countries race to regulate or embrace crypto, India has the opportunity to set a precedent that could shape the future of digital finance on a global scale.
