SEBI Proposes New Regulations for Crypto AIFs in India

In a significant and much-anticipated move for India's digital asset landscape, the Securities and Exchange Board of India (SEBI) has released a new consultation paper outlining a proposed regulatory framework for Alternative Investment Funds (AIFs) seeking to invest in cryptocurrencies and other Virtual Digital Assets (VDAs).

The paper, released on Tuesday evening, signals a major step by the market regulator to bring a slice of the largely unregulated crypto industry under its direct oversight. While India still lacks a comprehensive, overarching bill for cryptocurrencies, this move specifically targets the high-value investment funds that have begun to explore the asset class, aiming to create guardrails and protect high-net-worth investors.

Here’s a quick breakdown of what SEBI has proposed and what it means for the Indian crypto market.

What are the Key Proposals?

The consultation paper is extensive, but the core proposals revolve around investor protection and risk disclosure. The key points include:

Higher Investor Threshold: SEBI has proposed that the minimum investment ticket size for any AIF with exposure to crypto assets be raised to ₹5 crore, significantly higher than the standard ₹1 crore minimum for AIFs. This is designed to ensure that only sophisticated, high-net-worth individuals (HNIs) who understand and can afford the risks are able to participate.
Stricter Custody Norms: The paper mandates that any AIF holding crypto assets must use a qualified, independent custodian to store the assets. This is a crucial step to prevent fraud and ensure the safety of the underlying assets, moving them away from potentially insecure exchange wallets.
Clear Risk Disclosures: AIFs will be required to provide bold, clear, and separate risk disclosures to investors, explicitly stating the high-risk, speculative nature of cryptocurrencies. These disclosures must be acknowledged by the investor before any funds are accepted.
Restrictions on Leverage: The proposal heavily restricts the use of leverage or borrowing for the purpose of investing in crypto assets, aiming to curb excessive risk-taking by fund managers.

Why is This Happening Now?

This move from SEBI is a direct response to the growing interest from family offices and high-net-worth individuals in the crypto asset class. Over the past couple of years, several AIFs have reportedly been set up to invest in digital assets, operating in a regulatory grey area.

SEBI's primary mandate is investor protection. By proposing these rules, the regulator is not necessarily "approving" of crypto as an asset class, but rather acknowledging its existence and taking steps to ensure that the fund management industry engages with it in a more transparent and secure manner. It's a move from ambiguity towards structured regulation, at least for the institutional side of the market.

What Does This Mean for Investors and the Industry?

The immediate impact of these proposals, if implemented, will be twofold.

For retail investors, this changes very little in the short term. The regulations are specifically for high-value AIFs, not direct crypto trading on exchanges.

For the crypto industry and institutional investors, this is a major sign of maturation. While the rules are strict, they also provide a potential pathway for regulated funds to offer crypto investment products in a compliant manner. This could lend a degree of legitimacy to the industry and potentially attract more institutional capital in the long run, as larger players are often more comfortable entering a market with clear regulatory guardrails.

Conclusion

SEBI's consultation paper is a crucial development in the ongoing story of crypto regulation in India. It indicates a shift from a hands-off approach to a more proactive, albeit cautious, engagement with the digital asset world. While the final regulations may evolve, the direction is clear: the wild west days of institutional crypto investing in India are coming to an end, and a new era of structured, regulated participation is on the horizon.

What are your thoughts on SEBI's move to regulate Crypto AIFs? Is it a positive step for the industry? Let us know in the comments.

SEBI Proposes New Regulations for Crypto AIFs in India