As the prominence of cryptocurrencies continues to rise across global financial landscapes, ensuring appropriate oversight and control of digital transactions is more crucial than ever before.
Suraj Sharma, Head of Public Policy & Govt Affairs, BNS & Onramp.money
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Despite the potential that cryptocurrencies hold in democratizing financial systems, significant challenges persist in effectively regulating them. One of the significant actors in this global cryptocurrency market is Binance, the world's leading crypto exchange by market volume. Yet, Binance’s operating methods, especially its 'escrow service' in India, are raising pertinent concerns about national security and regulatory oversight.
Binance’s escrow service, which allows Indian traders to transact in Indian Rupees (INR), acts as an intermediary between local buyers and sellers. It holds the user's crypto assets in escrow until the trade is completed, creating an offshore marketplace where transactions are completed in INR. Alarmingly, the exchange fails to regulate these third-party transactions adequately, enforcing necessary security requirements.
Moreover, the transactions are facilitated through various payment options, including UPI, IMPS, G-Pay, cash deposits, and in-person cash exchanges, making the monitoring process even more complex for Indian regulators. This opacity in transactional processes could potentially allow clandestine trades, bypass taxation, and convert crypto assets into INR through unregulated and unverified third parties.
Notably, while Binance has not overtly violated any laws—considering cryptocurrencies are not recognized as legal tender in India—it is operating within murky regulatory waters. Binance's lack of due diligence and strict AML/CFT measures, its endorsement of mixing services, and its connections with non-verified third-party tools and services, have severe implications for India's national security.
The platform has seen resistance from regulators worldwide. Binance recently faced objections from authorities in the US, France, and Belgium, questioning its compliance with their respective national laws. Even as Binance vows to defend itself against these allegations, stating it abides by all laws in France, the actions of regulators paint a different picture. Binance has also exited from jurisdictions like the Netherlands and Canada, where stringent cryptocurrency laws have been enforced. These developments raise significant questions about Binance's commitment to complying with established laws and norms.
Binance's 'basic' KYC formalities are also cause for concern. The exchange has been reportedly onboarding customers with only the minimum KYC checks, subsequently moving these customers onto products provided by third-party vendors, over which Binance has no regulatory control. This lax approach towards AML/CFT measures not only exacerbates the risks for customers but also presents significant national security concerns.
The transfer of vast sums of money across borders through minimally verified third parties questions the very intent behind such transactions, exacerbating the security risk. Additionally, Binance's role as a mediator in times of disputes raises significant concerns about the safety and security of the buyer and seller involved in these transactions. The platform's inability to verify and monitor these transactions effectively could potentially pave the way for illicit activities, thereby impacting the country's economic stability and national security.
It is crucial to note that the risks associated with Binance’s operational methods do not undermine the potential of cryptocurrencies. Instead, these challenges highlight the need for robust and comprehensive regulatory frameworks that can harness the potential of cryptocurrencies while mitigating associated risks.
It is indeed concerning that restrictive tax rules on crypto have led to a decline in user activity in the Indian marketplace. However, with high-level concerns around crypto transactions, it is paramount to have a favorable regulatory framework that ensures rigorous security measures, curbing industry practices that pose a risk to national security.
The steps towards regulation must also extend to educating customers about the potential risks associated with engaging with platforms like Binance, dissuading them from moving onto more exotic products within these largely unregulated marketplaces.
In conclusion, while cryptocurrencies hold enormous potential, effective and robust regulations are necessary to ensure they contribute to economic growth rather than becoming a conduit for illicit activities. It is high time we address the risks associated with platforms like Binance and safeguard our national security while capitalizing on the opportunities that cryptocurrencies offer.
(The author is Head of Public Policy & Government Affairs, BNS)
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