On Wednesday, Vitalik Buterin, the founder of crypto-blockchain network Ethereum, donated over $1 billion worth of crypto-currencies to the India Covid-Crypto Relief Fund (ICCRF), according to EtherScan. This donation is worth over $7,300 crore (notional), and is perhaps the biggest philanthropic donation to the country by any single entrepreneur.
The ICCRF was started by the local crypto-community towards the last week of April, led by Sandeep Naliwal, the founder and chief operating officer at blockchain firm Polygon. The fund has received support from various members of the global crypto community, including Buterin and Silicon Valley veteran Balaji Srinivasan.
As of Thursday, the ICCRF had garnered a corpus worth over $1 billion in crypto-currencies. But due to government regulations civil-society groups that are providing healthcare and other relief services across the country, may face issues in trying to access these funds. It is not as simple as selling these crypto-currencies for Indian Rupees and handing over cash to the NGOs.
The fund is donating money to only those charities that are in compliance with the Foreign Contribution Regulation Act (FCRA) and is using a Dubai-based banking entity to satisfy regulatory concerns. So far, the fund has managed to donate $2 million to local non-government organisations (NGOs) that are working on the ground in response to the second wave of the COVID-19 virus, Naliwal of Polygon told MediaNama.
What is ICCRF’s strategy?
“The modus operandi is to keep the fund in compliance with regulations. We had initially thought of creating Indian bank accounts and deposit the funds into these accounts, using Indian crypto-exchanges. But the problem is that there is legal ambiguity,” Naliwal said. This prompted the fund to separate the foreign contribution piece of the puzzle from the crypto piece, by using a Dubai-based bank, he said. This allows the fund to not fall foul of the FCRA rules.
“The crypto-currency in the fund is converted into fiat currencies and deposited into bank accounts. The money in these bank accounts is then transferred to the Dubai-based account. From Dubai, the money goes to only FCRA registered NGOs,” Naliwal said. The fund plans to liquidate the corpus in tranches, around $100 million each, and is looking to find market-makers who can support these transactions, he added.
- ICCRF has a Ethereum address which is accepting donations from crypto-investors
- ICCRF then liquidates the crypto-currencies in its corpus through global crypto-exchanges
- The crypto-exchange then settles the trade and provides fiat currency to ICCRF
- ICCRF then transfers this fiat currency from a bank account linked to the exchange to a Dubai-based bank
- The Dubai bank send the money to FCRA-compliant NGOs
Vivek Iyer, Partner and National Leader Financial Services-Risk Advisory-Grant Thornton Bharat LLP said that this mode of funding requires the fund to tie up with crypto-exchanges in jurisdictions that allow crypto-investments and fiat currencies. “If the money is converted into cash, US Dollars, and is deposited in a regulated bank, it can be brought to India without violating the FCRA rules. To liquidate the cryptos in India, convert it into Rupees and then donate it to NGOs, could raise a lot of red flags,” he said.
“When there is an inward remittance to a bank, they will see the jurisdiction and source of funds. But if the bank sees that the money is coming from a ‘Crypto Relief Fund’ they may red-flag it and it could result in questions around undisclosed income. What you need is an entity or a particular person, that the bank trusts, to drive the initiative. By identifying the source of funds and jurisdiction from where it has come from, the banks and government authorities can determine the legitimacy of these funds and the taxability of the donations” —Vivek Iyer, Partner, Grant Thornton Bharat LLP
What are the risks of crypto-rupee donations?
On paper, there are legal issues in India when it comes to crypto-currencies since there are no regulations for crypto-exchanges and investing. As of today, crypto-exchanges are persona non grata to some of the top private sector banks and payment gateways, so they cannot convert these cryptos into Indian Rupees easily. On the other hand, charities and NGOs that are registered cannot accept donations in crypto-currencies and take on the burden to convert these instruments into Rupees. Not only are they legally barred from doing so, but the process is complicated and time-consuming.
While Polygon is a registered Indian business, liquidating a $1 billion is not going to be easy. Even with the help of the top crypto-exchanges in the country, the ICCRF cannot sell $1 billion worth of crypto-currencies in local markets in exchange for Indian Rupees and hand this cash over to NGOs. Experts told MediaNama that banks may have concerns processing such a transaction from a foreign exchange, crypto-regulations and risk point of view.
But even if ICCRF liquidates a part of the fund, say $1 million in a tranche, the banks and payment service providers would need provide channels to the ICCRF to transfer Indian Rupees to the NGO. A founder at an Indian crypto-exchange told MediaNama that regulators may ask the banks for the source of funds, which is why they are finding it hard to convert crypto-donations to Rupees. “Even using regular payment channels is risky because the banks only know the identity of the sending bank, but not who the ultimate donators are and from where they got the funds to donate. There is a regulatory risk for them and us,” this person said on the condition of anonymity.
Industry wants FCRA exemption
Last year, the government amended the FCRA, mandating NGOs to open a bank account with the State Bank of India (SBI) in New Delhi by March 31, 2021, in order to continue receiving foreign funds. The law also required Aadhaar-based verification of all office-bearers, directors and other key functionaries of the NGO. Interestingly, the Prime Minister’s Citizen Assistance and Relief in Emergency has been granted an exemption from the FCRA rules under Section 50 of the Act.
Two NGOs have challenged these rules and have moved the courts seeking an exemption from complying with this rule. In one petition before the Delhi High Court, an NGO said that out of 22,457 active FCRA NGOs only 3,616 have opened an account with SBI in New Delhi, while another petition before the Gauhati High Court said that only 16% of registered charities had opened the SBI account in compliance with the rules, according to a report by The Hindu.
“While dealing or trading in cryptocurrencies is currently not per-se prohibited in India (pending the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021), but receiving cryptocurrencies in the form of donations from overseas will have to be transferred through an exchange dealing in such cryptos for their liquidation,” said Rishi Anand, Partner at DSK Legal. “From a legal standpoint the question remains whether receipt of cryptocurrency by an organisation will be treated as foreign contribution, and thus requiring the receiver to have FCRA registration,” he said.
The high threshold for NGOs and compliance delays effectively curtail the number of NGOs that can receive donations, aid and resources be it from the ICCRF and other global community efforts and foreign organisations.
For now, the ICCRF is using an external and regulated vehicle to transfer fiat foreign currency to authorised NGOs to not fall foul of the FCRA rules. But a $1 billion fund, that compounds and grows over the coming months, can be a boon for India’s COVID-19 fight. The Indian government is faced with a Hobson’s Choice: To accept crypto funds towards COVID-19 relief efforts, or not.
If the banking regulator and government intervene, the ICCRF may not be able to liquidate the entire $1 billion fund and donate the money to NGOs in need. One solution, proposed by the wider industry is for the government to grant FCRA exemptions to a number of NGOs and charities so that funds that have been collected globally can reach people in need.
Blockchain and Emerging Tech Evangelist Sharat Chandra said that if the government considers a temporary FCRA exemption to local crypto-currency exchanges and blockchain firms, groups that are providing relief work can access more of these funds as crypto-investors and companies are willing to contribute more. Chandra is working with Hedera Hashgraph, a blockchain platform, to gather crypto-funds and provide them as donations to local NGOs.
“Most banks have ditched the crypto-exchanges in India, so it is not possible to liquidate the crypto-currencies quickly. Even if the exemption is not granted, this money can go towards covering the costs for vaccines also. The government also stands to make a lot of money if it wants to tax it. It can fund various schemes with this potential tax revenue”—Blockchain and Emerging Tech Evangelist Sharat Chandra
Even the apex IT industry body NASSCOM has called on the government to grant FCRA exemptions to NGOs working on COVID-19 relief.
We urge the Govt to urgently provide a temporary waiver to the FCRA Act and the 2020 amendments in view of this devastating second wave. This will enable the industry to bring in the required aid/supplies to India. @debjani_ghosh_
— NASSCOM (@nasscom) May 12, 2021
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