Sri Lanka

**Report: Retail Cryptocurrency Trading Status in Sri Lanka**

**Topic:** Retail_Trading_Status

**Description:** Assess whether individual citizens and residents in the country are legally permitted to buy, sell, and hold cryptocurrencies. Detail the regulatory environment surrounding this activity (e.g., KYC/AML requirements imposed on platforms, general warnings issued)

**1. Identified Status:**
**Gray-Zone**

**2. Detailed Narrative Explanation:**

The status of retail cryptocurrency trading (buying, selling, holding) for individual citizens and residents in Sri Lanka falls into a **Gray-Zone**. This is primarily because there is no explicit, comprehensive legislation that outright bans the holding or domestic peer-to-peer trading of cryptocurrencies, nor is there a specific regulatory framework that permits and governs it. However, the Central Bank of Sri Lanka (CBSL) maintains a strongly negative stance, issuing repeated warnings and imposing significant restrictions that severely curtail crypto-related activities, creating substantial legal ambiguity and practical hurdles.

**Historical Context and CBSL Stance:**
The CBSL has consistently warned the public about the risks associated with cryptocurrencies since at least 2018 [2, 6]. These warnings highlight significant financial, operational, legal, security, and customer protection concerns [2, 5]. The CBSL explicitly states that cryptocurrencies (or Virtual Currencies - VCs) are "largely unregulated digital representations of value" issued by private entities [6]. They are not considered legal tender in Sri Lanka, meaning they cannot be legally used for payment of debts or other obligations [2, 4, 5]. Furthermore, the CBSL does not recognize cryptocurrencies as a formal asset class and emphasizes the lack of regulatory safeguards for their usage within the country [2, 13].

**Regulatory Restrictions (Foreign Exchange Act):**
A key restriction stems from the Foreign Exchange Act, No. 12 of 2017. Directions No. 03 of 2021 issued under this Act explicitly prohibit the use of Electronic Fund Transfer Cards (EFTCs), such as debit and credit cards, for payments related to cryptocurrency transactions [2, 3, 4, 6, 7, 12]. This significantly restricts the ability of individuals to purchase cryptocurrencies directly from foreign exchanges using conventional banking channels, pushing activities towards informal or peer-to-peer (P2P) methods, often involving foreign currency outflows which the CBSL seeks to prevent [2, 7].

**Lack of Licensing and Authorization:**
The CBSL has clearly stated that it has not issued any license or authorization to any entity or company to operate schemes involving cryptocurrencies. This includes Initial Coin Offerings (ICOs), mining operations, virtual currency exchanges, deposit-taking, custody services, or investment advisory services related to cryptocurrencies [2, 5, 6, 12, 14, 21]. This lack of authorization means any platform operating within Sri Lanka or targeting Sri Lankan residents does so without regulatory approval, leaving users without legal recourse in case of disputes or platform failures [8, 9].

**Warnings Against Scams and Promotion:**
The CBSL frequently warns the public about the prevalence of financial scams operating under the guise of crypto investments, often promising high returns [2, 5, 6, 19]. They have identified and requested criminal proceedings against entities promoting prohibited schemes involving cryptocurrencies, citing violations of the Banking Act No. 30 of 1988 (specifically Section 83C concerning pyramid schemes) [3, 5, 13]. The CBSL strongly advises the public against investing in or engaging with any cryptocurrency schemes and warns those promoting such investments to cease their activities [2, 5, 19, 21].

**Ambiguity and Practical Reality:**
Despite the strong warnings and restrictions, particularly concerning foreign exchange transactions and the lack of licensed entities, there isn't an explicit law banning the mere holding or P2P trading of cryptocurrencies using local currency within Sri Lanka [3, 7]. Some sources note that despite the lack of legalization and the risks, cryptocurrency usage exists island-wide, often through P2P methods [3, 10]. The government has acknowledged the presence of young people involved in cryptocurrency and the suggestion to relax regulations, indicating an ongoing debate [15]. However, the official stance remains highly cautious, emphasizing volatility, risks, and the need for proper regulation (which is currently absent) before any potential acceptance [15]. The Securities and Exchange Commission (SEC) of Sri Lanka currently does not appear to have specific regulations governing cryptocurrencies either, though the CBSL Governor has mentioned the need for a regulatory authority like the SEC if crypto were to be allowed as an asset class [15].

**Conclusion on Status:**
The situation is not "Allowed-Regulated" as there are no specific regulations or licenses. It is not "Allowed-UnRegulated" due to the severe warnings and specific prohibitions (like using cards for foreign transactions). It is not definitively "Banned" in the sense that holding or domestic P2P might not be explicitly illegal under all circumstances, although highly discouraged and restricted. It is also not entirely "Unclear," as the CBSL's negative stance and specific restrictions *are* clear. Therefore, **"Gray-Zone"** best describes the status: activity exists in the shadows, heavily discouraged by the central bank, lacking legal recognition or protection, and severely restricted by foreign exchange controls, but without a blanket statutory prohibition on all forms of retail possession or domestic exchange. Individuals engaging in retail trading do so at significant personal risk and operate outside any formal regulatory protection [11].

**3. Specific, Relevant Text Excerpts:**

*   **(2023-03-29) Central Bank of Sri Lanka (CBSL):** "Further, cryptocurrencies are not considered as legal tender in Sri Lanka and have no regulatory safeguards relating to their usage in the country. As per the Directions No. 03 of 2021 under Foreign Exchange Act, No. 12 of 2017, Electronic Fund Transfer Cards (EFTCs) such as debit cards and credit cards are not permitted to be used for payments related to cryptocurrency transactions." [2]
*   **(2023-03-29) Central Bank of Sri Lanka (CBSL):** "The public is reminded that cryptocurrencies are unregulated investment instruments which are not recognized as an asset-class in Sri Lanka." [2]
*   **(2023-03-29) Central Bank of Sri Lanka (CBSL):** "CBSL has not issued any licence or authorized any individual or business to operate schemes involving cryptocurrency, and has not authorized any Initial Coin Offerings (ICOs) or any variant of it, cryptocurrency mining operations, cryptocurrency exchanges, deposit-taking or custody services related to cryptocurrency or any cryptocurrency investment advisory service." [2]
*   **(2023-11-02) Ministry of Defence - Sri Lanka (citing Colombo Telegraph):** "Despite its popularity, neither Crypto has been considered as legal nor the entire banning of the Crypto market has been imposed by the Sri Lankan government." [3]
*   **(2025-02-03) The Morning:** "In the Sri Lankan context, crypto-currencies are not considered legal tender in Sri Lanka and there is no regulatory mechanism relating to their usage in the country. As per Direction Number Three of 2021 under the Foreign Exchange Act, No. 12 of 2017, electronic fund transfer cards are not permitted to be used for payments related to crypto-currency transactions." [4]
*   **(2024-05-28) EconomyNext (quoting CBSL Governor):** "Weerasinghe stated that the decision to allow or disallow the use of cryptocurrency as a payment means or as an asset class rests with the government. He emphasised the need for a proper regulatory mechanism and a regulatory authority like the Securities and Exchange Commission (SEC) to ensure transparency and prevent money laundering." [15]
*   **(2022) Academic Paper (Senanayake, B.S.):** "As of yet, Sri Lankan law does not provide any framework for regulating the cryptocurrency investment industry, even though warnings have come forward from the Central Bank of Sri Lanka." [16]

**4. Direct URL Links to Sources:**

1.  **CBSL Press Release (Mar 2023):** Risks of using and investing in Cryptocurrency
    *   URL: `https://www.cbsl.gov.lk/en/news/risks-of-using-and-investing-in-cryptocurrency-2023` [2] (Note: Also available in Sinhala [19] and likely Tamil)
2.  **Ministry of Defence Article (Nov 2023):** The Urgent Need to Regulate the Sri Lankan Cryptocurrency Market
    *   URL: `https://www.defence.lk/Article/view_article/1069` [3]
3.  **The Morning Article (Feb 2025):** Impact of digital currency on econ. security
    *   URL: `https://www.themorning.lk/articles/y9j5Xy3R2b1b7G7h16XJ` [4]
4.  **CBSL Public Awareness Notice (Jan 2024):** Protecting the public from crypto investment scams
    *   URL: `https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/news_20240114_Protecting_the_Public_from_Crypto_Investment_Scams_e.pdf` [5]
5.  **CBSL Public Awareness Notice (Jul 2022):** Public Awareness in Relation to the Use of Virtual Currencies in Sri Lanka
    *   URL: `https://www.cbsl.gov.lk/en/news/public-awareness-in-relation-to-the-use-of-virtual-currencies-in-sri-lanka` [6]
6.  **INSS Article (Undated, references 2023):** Prospects and challenges of Cryptocurrencies in Sri Lanka
    *   URL: `https://inss.lk/prospects-and-challenges-of-cryptocurrencies-in-sri-lanka/` [7]
7.  **EconomyNext Article (May 2024):** Sri Lanka's Central Bank Governor Discusses Cryptocurrency Regulation Amidst Calls for Relaxation
    *   URL: `https://economynext.com/sri-lankas-central-bank-governor-discusses-cryptocurrency-regulation-amidst-calls-for-relaxation-164887/` [15]
8.  **Academic Paper (Senanayake, B.S., 2022):** The Need for a Regulatory Framework to govern Digital Currencies in Sri Lanka
    *   URL: `https://ir.kdu.ac.lk/handle/345/5827` [16]
9.  **Foreign Exchange Act Directions (Requires specific search on CBSL/Govt sites for the text of Direction No. 03 of 2021):** (Primary legal source, often cited but direct link to the specific direction text may require navigating the CBSL site's legal sections). A reference is made in source [2].

*(Note: Source dates reflect publication dates where available. The current date is April 13, 2025. The information reflects the status based on the available search results up to this date.)*