Crypto bill: Addressing the elephant in the room
While India has decided to not recognise bitcoin as a legal tender, the 2022-23 Union Budget has proposed to impose a 30% tax on gains made on such trades, besides subjecting crypto transactions beyond a threshold to 1% TDS. In context of the ongoing debate on whether crypto currency is a boon or a bane, IBT analyses the possible contours that cryptocurrency regulation should now take.
- From barter to metal coins to fiat currency and then cryptocurrency, the history of money has seen quite a few fascinating developments, of which bitcoin is the most recent.
- Recently, El Salavador became the first country in the world to use bitcoin as legal tender (along with the US dollar).
- At the same time, opinion remains divided in the world regarding cryptocurrency regulation with some countries adopting a pro-cryptocurrency stance and others outrightly banning it.
- India, too, is seeing a surge in adoption of this new age currency. India’s cryptocurrency market grew 641% in the year through June 2021. The government is working on the ‘Cryptocurrency and Regulation of Official Digital Currency Bill’.
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Back in 6,000 B.C., when money didn’t exist, Mesopotamian tribes introduced a barter system (or simply, exchange of goods and services) in order to carry out trade and meet their day-to-day requirements. This was the Gradually, money was widely adopted as a legal tender, first in 1,000 B.C., to conduct transactions. Today, money has evolved from tangible form such as the U.S. dollar to virtual cryptocurrencies like Bitcoin.
Recently, El Salavador became the first country in the world to use bitcoin as legal tender (along with US$). India, too, is not far behind in this cryptocurrency race. It is interesting to note that while India has decided to not recognise bitcoin as a legal tender, the 2022-23 Union Budget has proposed to impose a 30% tax on gains made on such trades, besides subjecting crypto transactions beyond a threshold to 1% TDS (Tax Deducted at Source). Finance Secretary TV Somanathan emphasised later that 30% is also the taxation rate for all speculative activities like horse racing and will never be legal tender.
At the same time, the government has maintained that only ‘Digital Rupee’ of the Reserve Bank will be a legal tender in India and it is working on the ‘Cryptocurrency and Regulation of Official Digital Currency Bill’. As the cryptocurrency market grows in India, it is pertinent to understand this concept, what the crypto bill encompasses and how it can be regulated.
What is cryptocurrency?
The birth of cryptocurrency goes back to 2008, when Bitcoin (the biggest and most essential cryptocurrency) was introduced. In a nutshell, cryptocurrency is a medium of exchange that is digital, encrypted and decentralized. According to estimates, there are more than 10,000 cryptocurrencies in existence today, including Bitcoin, Ethereum, Bitcoin Cash, Litecoin, Tezos, EOS, and ZCash. Blockchain technology secures cryptocurrency. Consulting firm, PwC explains:
A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority.
Blockchain technology is associated with a number of advantages such as accurate tracking, increased transparency, permanent ledger, and cost reduction. However, there are certain threats also. These include complex technology, regulatory implication, implementation challenges, and competing platforms.
India: The burgeoning crypto market
A report by industry research firm Chainanalysis suggests that India has the second-highest cryptocurrency users in world. Further, the crypto market in India grew 641% in the year through June 2021. The report attributed this rising popularity of cryptocurrency in India to the fact that typically, the investment process in the country take 3-4 days and endless documentation, while it takes barely an hour to invest in cryptocurrency.
Global Crypto Adoption Index: Top 10 Countries
|Country||Index score||Overall rank||On-chain value received||On-chain retail value received||P2P exchange trade volume|
Source: Geography of Cryptocurrency Report, Chainalysis (Oct’21).
The report adds that India and Vietnam’s markets are much larger than Pakistan’s. It also notes that India has a much higher share of activity taking place on DeFi platforms at 59%, versus 47% for Vietnam and 33% for Pakistan. In India, large institutional-sized transfers above US$ 10 million worth of cryptocurrency accounted for 42% of transactions in contrast to 28% for Pakistan and 29% for Vietnam. However, while India’s cryptocurency market appears to be more mature, Pakistan experienced the most growth at 711%, just ahead of India at 641%. The report quoted Joel John, a principal at cryptocurrency investment firm LedgerPrime:
There used to be a certain amount of stigma. In 2014, if you were at a VC event and said you were in crypto, you might have someone coming up to you later in the evening asking if you could get them drugs online. Now, crypto has become the cool place to be.
Why does cryptocurrency need regulation?
Virtual currencies have no single authority regulating their issuance. They also have the advantage of eliminating third party merchants such as Visa or Master Card, thereby, reducing the transaction cost. Cryptocurrency transactions are validated by other users and then stockpiled in a secure manner.
An Inter-Ministerial Committee (IMC) constituted to study the issues related to virtual currencies (2019) recommended the banning of the cryptocurrencies in India and imposing fines and penalties for carrying on of any activities connected with cryptocurrencies in India. The report said:
The Committee recommends that all private cryptocurrencies, except any cryptocurrency issued by the State, be banned in India. Accordingly, the Committee has recommended a law banning the cryptocurrencies in India and criminalising carrying on of any activities connected with cryptocurrencies in India.
This was on account of the risks associated with them and volatility in their prices. Some of the technical risks identified by the committee were scalability and transaction speed; interoperability and integration; cyber security; data privacy; key management; governance & lack of maturity. It also highlighted a few legal and regulatory challenges such as lack of vetting standards, clarity about ownership and jurisdictions; customer due diligence requirements; and concerns regarding how transaction disputes or erroneous transactions can be resolved.
How are cryptocurrencies handled around the world?
Given the growing popularity of cryptocurrency and the lack of cetralization, different countries around the world have started developing regulations around it. Canada Revenue Authority (CRA), for example, generally treats cryptocurrency like a commodity for purposes of income tax. The same is the case with Australia. The US, on the other hand, does not prohibit the use of cryptocurrencies, it has regulations for these digital coins that vary from state to state.
While the United Kingdom has not formulated separate legislation regarding the regulation of cryptocurrency, the Financial Conduct Authority (FCA) has stringent rules regulating licensing to authorised cryptocurrency-related businesses. It also levies taxes on crypto trading. Japan has allowed the use of cryptocurrencies as a payment system.
However, according to the Law Library of Congress report of November 2021, 51 countries have banned or are in the process of banning cryptocurrencies. These include China, Algeria, Bangladesh, Egypt, Iraq, Morocco, Nepal, Qatar, Moldova and Tunisia, among others.
Crypto Bill: Is cryptocurrency regulation bad?
Cryptocurrency regulation has been a bumpy ride over the past 10 years. It started in 2013, with the RBI warning the public against the use of cryptocurrency. But as banks continued to support transactions on cryptocurrency exchanges, the RBI released another circular in February 2017, where it re-emphasised its concerns. By the end of 2017, both the RBI and finance ministry had released another warning; stating that cryptocurrencies were not legal tender. Two PILs were also filed in the Supreme Court, one asking for a ban, and the other asking for regulation.
In March 2018, the Central Board of Direct Taxes (CBDT) submitted a draft scheme to the finance ministry to ban cryptocurrencies. A month later, RBI issues a circular barring commercial and co-operative banks, payments banks, small finance banks, NBFCs, and payment system providers from dealing in virtual currencies, or providing services to all entities which deal with crypto exchanges. However, in March 2020, the Supreme Court lifted the curb.
Taking cognizance of the risks associated with cryptocurrency, Indian government is working on ‘Cryptocurrency and Regulation of Official Digital Currency Bill’. The draft crypto bill defines cryptocurrency as “any information, code, or token which has a digital representation of value and has utility in a business activity, or acts as a store of value, or a unit of account.” At the same time, the RBI is slated to introduce a digital currency in 2023, which will have an intrinsic value due to the sovereign backing, and hence being a legal tender.
Some of the concerns associated with the bill are:
- The broad scope of definition of cryptocurrency. It may encompass various forms of digital tokens which have not been generated through cryptography.
- The bill ignores the fact that there are also many advantages such as better record keeping and more efficient cross border payments associated with cryptocurrency.
- The penalties prescribed for certain offences under the Bill seem to be disproportionately higher compared to other similar economic offences in the country.
However, there are others who believe that cryptocurrency regulation is vital. For example, the Blockchain Council is optimistic that the new policies that the GoI will bring in the future, will fix the irregularities and issues in this otherwise revolutionary eco-system having many paradigm-changing innovations. Similarly, Sharan Nair, Chief Business Officer, CoinSwitch, opines:
The world is moving towards a decentralized future. Tech revolution and crypto-assets play a functional role in building the disruptive decentralized world, aka Web3.0. Regulation of crypto assets is of paramount importance as Indian citizens need to have access to crypto assets in a safe and secure manner. Crypto is better used as an asset instead of currency, considering India already has faster payment systems like UPI.
Putting the best foot
The industry has a few suggestions that the crypto bill can incorporate. The Blockchain Council suggests that the bill should allow for innovation, while ensuring that it is able to build consumer and investor confidence in cryptocurrencies, and more importantly, the underlying technology of blockchain. They opine:
Provisions that can help avoid price manipulation, monopolization and bring more clarity on use cases surrounding the Blockchain technology will add value.
Nair suggests that the crypto bill must focus on classifying crypto as an asset, there should be a proper framework for the movement of funds, the industry needs rigorous KYC (know your customer) procedures & a proper reporting structure must be put in place. A regulatory body that overlooks both the cryptocurrency and the blockchain players looks to be a primary starting point. It should properly classify cryptocurrency assets and also p
But experts also point out that it would take time for a new regulator to fully grasp the intricacies of this sector. Having said that, India needs to make a start as soon as possible, and the regulatory mechanisms can evolve subsequently in consultation with stakeholders; promoting responsible innovation and managing risk. Letting the industry continue without regulation for long could be extremely debilitating.