Offshore crypto contract tied to Jio Platforms exposes India's regulatory gaps
New Delhi, Nov. 11 -- A week before India's largest-ever initial public offering (IPO) opened for subscription, Jio Platforms already had a market price. It was being set not on the National Stock Exchange or BSE, but on a cryptocurrency exchange registered in Seychelles.On 14 October, Bitget listed 'JIOUSDT', a perpetual futures contract linked to Jio's expected listing price. It was settled not in rupees but in Tether (USDT), a dollar-pegged stablecoin. The contract traded round the clock and allowed participants to make leveraged bets on Jio's listing price, outside the direct oversight of the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI). After the IPO, JIOUSDT transitioned into a regular perpetual futures contract linked to Jio's prevailing market price.Perpetual futures are derivatives popular in the crypto ecosystem. They allow traders to bet on an asset's price without owning it and, unlike conventional futures, have no expiry date. JIOUSDT does not give traders any Jio shares; it is a synthetic derivative that offers exposure to the stock's price movements. The contract allows leverage of up to 20 times, meaning a trader can post $100 as collateral to take a $2,000 position.For policymakers, this raises three major concerns.The first is price discovery. For a week before the IPO, Jio had a visible price formed entirely outside India's capital markets. Yet safeguards that govern price discovery on regulated exchanges, including auctions, surveillance and circuit breakers, do not appear to apply to JIOUSDT.The second is market integrity. Under Sebi's insider trading regulations, anyone possessing unpublished price-sensitive information about listed or proposed-to-be-listed companies is barred from trading in their securities. Jio's IPO was subject to these rules, but their application to JIOUSDT is far less clear. Sebi had no direct oversight of an offshore exchange such as Bitget, limiting its ability to monitor trading or investigate suspicious activity. On decentralized platforms, where identity checks may be absent, the challenge is even greater. Anyone with inside information and a crypto wallet could potentially trade such contracts before a listing, making enforcement of Indian rules extremely difficult.The third concern is the capital account. The RBI's Liberalised Remittance Scheme (LRS) does not permit Indian residents to remit money abroad as margin for trading. This is precisely what perpetual futures require. But LRS operates through the formal banking system, while crypto transactions can move through a borderless ecosystem.A resident could, in theory, buy USDT and post it as margin for JIOUSDT, potentially bypassing the restrictions imposed through LRS. It is unclear whether the Foreign Exchange Management Act (Fema) specifically applies to crypto assets, even as the Enforcement Directorate (ED) has investigated domestic exchanges over suspected unauthorized cross-border transactions.India has a limited regulatory framework for crypto assets. Existing measures on anti-money laundering and taxation help authorities identify domestic users and collect revenue. But they offer little visibility into products offered by offshore exchanges, let alone how their prices are formed or whether their markets are being manipulated.This creates a regulatory gap. Sebi oversees securities and Indian exchanges, while the RBI regulates foreign exchange markets. Perpetual futures contracts created by third-party entities for Indian stocks or bonds fall between these jurisdictions, with no clear framework governing them.Contrast this with the Depository Receipts Scheme of 2014, under which depository receipts backed by eligible Indian securities and issued in overseas markets are subject to a detailed framework involving the finance ministry, Sebi and the RBI.This might seem like a storm in a teacup. JIOUSDT's trading volumes are relatively low, and it could even be argued that such contracts improve domestic price discovery. The larger problem, however, is that JIOUSDT could become a template. Any Indian asset could acquire an offshore 'shadow' market beyond the effective oversight of domestic regulators. A more difficult question is who bears liability for adverse outcomes, including potential spillovers into Indian markets.There is also a sense of irony here. During its G20 presidency in 2023, India sought to put the cross-border risks of crypto assets at the centre of the global agenda. At the request of Indian authorities, the International Monetary Fund (IMF) and Financial Stability Board (FSB) prepared a synthesis paper on crypto assets, covering risks specific to emerging market economies. In October 2023, G20 finance ministers adopted its proposals as the official 'G20 Roadmap on Crypto Assets', calling for swift and coordinated implementation of regulatory frameworks and greater cross-border coordination. India helped shape the global conversation, but domestic implementation of the agenda remains incomplete.Going forward, there can be no substitute for a comprehensive regulatory framework for crypto activities, aligned with international standards. Crypto markets do not respect physical boundaries, and countries that seek to regulate them in isolation risk inviting regulatory arbitrage. Building such a framework, however, will require serious intent, time and effort.In the interim, authorities could explore ways to bring such activity closer to home. When SGX Nifty futures drew trading offshore, Indian exchanges withdrew their index licences in 2018. By 2023, the same futures were being offered in GIFT City instead. Unlike SGX, offshore crypto entities do not need an Indian licence to offer India-linked products. But authorities could explore whether regulated equivalents in GIFT City could help bring some of this trading onshore.For offshore exchanges and decentralized protocols, however, there is no licence to withdraw and no office to inspect. Cross-border regulatory coordination and alignment with global standards will therefore be essential.The author is Fellow-II, National Institute of Public Finance and Policy (NIPFP). Views expressed are personal and do not necessarily reflect those of NIPFP or the Ministry of Finance. Published by HT Digital Content Services with permission from MINT. For any query with respect to this article or any other content requirement, please contact Editor at [email protected]