Cryptocurrency Regulation: Need of the hour

Sanchit Vijay, Partner – Deals & Valuations, Corporate Professionals, speaks about the government’s Cryptocurrency and Regulation of Official Digital Currency Bill 2021, the ambiguities surrounding crypto-transactions, and the challenges in regulations. He opines that it is important to regulate the market since cryptocurrency & virtual digital asset is booming & there are threats related to cyber security.

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Cryptocurrency is a digital or virtual currency which is a digital medium of exchange built on technological platforms such as the blockchain. As per the 2022 budget, it is “any information, code, number or token generated through cryptographic means or otherwise, which has a digital representation of value and has utility in a business activity, or acts a store of value, or a unit of account.” 

This definition includes all the cryptocurrencies, the NFTs, the in-game items, the digital art, digital music, digital texts and the like. The scope of cryptocurrencies is widening to include all possible forms of digital assets. The Indian Government has not yet granted any status of legal tender to cryptocurrencies. 

In 2018, RBI tried to impose a ban by restricting banking facilities to the crypto-exchanges which was later ruled out by Supreme Court.  But it would be foolhardy to assume that the government will not be closely monitoring the cryptocurrency environment. India has the highest number of crypto users in the world, with almost 100 million people with an investment value of nearly US$ 6.6 billion. This makes it imperative that there are some regulations put in place. 

Regulations: Cryptocurrency Regulations Announced in Budget 2022

The taxation structure stands at 30% of any virtual digital asset income. No cost of acquisition will be allowed as deduction or any loss on transfer of virtual digital asset will be allowed for set off or carry-forward purposes. This came into effect from the 1st April, 2022. Any gift of cryptocurrency or Virtual Digital Asset to any recipient is taxable in their hands. Also, TDS will be charged at 1% for Virtual Digital Assets Transactions. This is applicable from 1st July 2022. The loss from sale of Virtual Digital Assets is also not allowed to be carried forward in the subsequent years.

With different aspects that have to be covered, including huge amounts of money and human capital, and a 15% CAGR that would be up till 2020, the regulations become necessary. The reasons could be to prevent either market manipulations or protecting the investors’ interest. Huge volatility can be seen in the cryptocurrency and the virtual digital asset. Therefore, it becomes important to educate the investors about the same so that they understand the risk. Also, it is very inherent that we control the market before its expansion since the crypto and the virtual digital asset is on the boom, it might become too unorganized to control. Also, there are threats related to fraud and cyber security risks as cryptocurrency ecosystem is built on technology. It makes it all the more susceptible to hacking and frauds that might happen. 

With proper guidelines, investors can protect their assets. Money laundering also needs to be combated. As a decentralized platform, there is no account of how much asset someone holds in an unregulated system or framework. Cryptocurrency is the go-to mode for any kind of transaction as it is much easier and safer in the absence of any trails. While there are rules pertaining to taxation, there is still no legalization of cryptocurrency in the budget. Therefore, it is paramount to attain some sort of clarity in that regard. Also, there is no clarity around how payments will be made for products or services by such Virtual Digital Assets. Since majority of the cryptocurrency transactions are carried out in foreign currency, the treatment of the gain or loss arising from the foreign exchange fluctuation need to be considered. 

With respect to GST, there is no clarity if cryptocurrencies are a good or a service and what kind of GST implication on the transaction fees would be there. Also, the enforcement of the TDS rules pertaining to cryptocurrency seem impractical related to the TDS rules affecting foreign investors versus the Indians. Going through decentralized exchange on p2p transactions is seen as a possible solution to paying taxes by a lot of small investors. So, the taxation laws and the regulations have to be made around these.

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Sanchit Vijay is Partner – Deals & Valuations, Corporate Professionals.