Market Makers – Cryptocurrency Exchanges – Law in India


There are no specific market maker laws when it comes to cryptocurrency exchanges in India. Some guidelines have been promulgated by the SEBI (Securities and Exchange Board of India), but these apply only to Shares and certain exchanges only. These rules can be viewed at

https://www.sebi.gov.in/legal/circulars/aug-1993/market-makers_19456.html#:~:text=Each%20such%20market%20maker%20approved,in%20each%20of%20the%20scrips

These SEBI Market Maker Guidelines do not apply to cryptocurrencies.

In accordance with SEBI guidelines, the following criteria have been defined for market makers:

  1. Market makers could be introduced in the stock exchanges in a phased manner and, to begin with, market making would only be introduced in the stock exchanges of Bombay, Calcutta, Delhi and Madras.
  2. Market makers according to SEBI are only allowed on exchanges.
  3. Each of these SEBI-approved market makers must create a market for a minimum of 5 scrips (equity shares). Initially, market making would only be introduced for scrips that are not included in the national BSE index. Each market maker will be required to acquire at least 30,000 shares in each of the scrips. SEBI may vary the minimum number of shares to be acquired depending on the par value of the share, the average delivery per settlement, the company’s free float, etc.

a. These guidelines apply only to Equity Shares.

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 instructions also do not apply to cryptocurrency exchanges, as they apply to OTC derivatives.

In accordance with the main direction above,

  • A Market Makers should only trade derivatives permitted under Government Guidelines.
  • Market makers may trade derivatives that have monetary instruments and/or permitted derivatives as constituents.
  • Market makers must not trade in derivatives containing a derivative as an underlying, except as expressly permitted under the terms of the Government Guidelines.
  • Market makers must not trade in derivatives, either directly or on a back-to-back basis, the price of which they cannot independently price.

In the context of this directive, “market maker” means an entity that provides prices to users and other market makers. (Explanation: authorized persons, authorized as such under section 10(1) of the Foreign Exchange Management Act 1999 (42 of 1999), authorized to undertake transactions in foreign exchange derivatives with users and other Approved Persons, will be treated as market makers in such transactions.) The term “Derivative” means (iv) “Derivative” shall have the same meaning as ascribed to it in Section 45U(a) of the law.

Section 45U(a) of the RBI Act defines the term “derivative” as follows:

(a) “derivative instrument” means an instrument, to be settled at a future date, the value of which is derived from the variation of the interest rate, the exchange rate, the credit rating or the credit index, of the price of the securities (also called the “underlying”), or a combination of several of them and includes interest rate swaps, forward rate contracts, currency swaps, currency swaps against Rupees, Currency Options, Currency Options against Rupees or such other instruments as may be specified by the Bank from time to time.

Now, regarding cryptocurrencies, these were broadly defined in 2022 under the Income Tax Act as follows:

Section 2 Subsection (47A) “Virtual Digital Asset” means–

(a) any information or code or number or token (not being Indian or foreign currency), generated by cryptographic means or otherwise, however named, providing a numerical representation of the value exchanged with or without consideration, with the promise or representation of having intrinsic value, or of functioning as a store of value or unit of account, including its use in any financial transaction or investment, but not limited to a program investment; and may be transferred, stored or exchanged electronically;

(b) a non-fungible token or any other token of a similar nature, however named;

(c) any other digital asset, as central government may, by notice in the Official Gazette, specify:

Explanation.- For the purposes of this clause,–

(a) “non-fungible token” means any digital asset that the central government may, by notice in the Official Gazette, specify;

(b) the terms “Currency”, “Foreign Currency” and “Indian Currency” have the same meanings given to them respectively 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 were first dealt with under Indian law, through an amendment to the Income Tax Act, in 2022, and cryptocurrencies were defined as entering in the category of virtual digital assets. Currently, with the exception of Section 2 (47A) of the Income Tax Act, cryptocurrencies have not been addressed or defined by any other law. The SEBI and RBI Master Direction guidelines regarding MARKET MAKER do not address cryptocurrencies. There is no law in India dealing with the MARKET MAKER of cryptocurrencies and these are still unregulated.

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