There have been rumours and speculations over a year regarding the future of cryptocurrency in India, as many suspected a ban on cryptocurrencies. The Indian Government in the latest announcement did not make any official announcement about legalising it, however, the Government has now put it in the tax framework whereby any profits generated from the crypto will be taxed at the rate of 30%. Further, 1% TDS on transfer of virtual assets above a threshold and gifts are also to be taxed. It can be comprehended as an extreme step as the high tax slab might deter the investors. Back in 2021 when China, which was the biggest bitcoin miner, banned the cryptocurrencies, it missed out on approximately $6 billion in annual crypto mining revenues. As a result of this move, there was a dramatic shift of investors to countries like Singapore and the US as these jurisdictions provide lenient regulations and invite both miners and investors. India seems to be following China as it introduces its own digital currency. The Finance Minister, Ms Nirmala Sitharaman also announced the launch of the digital currency by the Central Bank of India, Reserve Bank of India (RBI) and the currency is set to be based on blockchain technology. This can be considered a welcome step as it promotes the digital economy and boosts the blockchain ecosystem. Moreover, introduction of digital currency will result into a cheaper and more efficient currency management system.
Digital Currency v. Cryptocurrency
Digital currency is considered as fiat currency in digital form. It is centralised which implies that it is regulated by a government authority whereas cryptocurrency is based on blockchain technology, and it is decentralised which implies that there is no interference of any government authority over investors. Both differ in technology and encryption; digital currency can be transferred by anyone with access to an online account, but cryptocurrency can only be transferred by the original holder. Another point to be noted is that digital currency is direct liability of the Central Bank whereas, in the case of cryptocurrency there is no State or financial entity backing it. Thus, crypto and digital currency cannot be treated in the same manner.
The reason why most of the jurisdictions have not regulated crypto is the nature of this currency which is decentralised and international. The essence of regulation must be to safeguard the interest of the investors and not to hamper the growth of the industry as strict regulations in place tend to drive away the investor to a crypto-friendly jurisdiction. The banning or strict regulations also impact the prices of cryptocurrencies for the short-term, which was witnessed during the time of China ban of the currency. On the flip side, it can be argued that the interest and safety of the State is also an important factor while determining the regulations as any amount can be carried from one country to another for any purpose, without a check this hold some serious concerns about trading in cryptocurrency. It can promote dealing in the dark web, funding terrorism or any illegal activity such as money laundering which goes against the public interest. Hence, considering these things one must keep a check or monitor such transactions to prevent capital flow outside the country.
Has cryptocurrency been legalised?
It is incorrect to suggest that it has been legalised as the Government has merely put it in the tax regime but there is no announcement regarding legalising the same and merely because the Government is taxing the gains from crypto, it cannot necessarily or explicitly mean that it is legalising it. The Government made an announcement introducing the official digital currency to be issued by RBI which in the current scenario means that apart from the Indian digital currency any other form of currency is not recognised. Taxation on crypto means that the Government is exercising its power to tax just like it can tax even the unaccounted transactions, for instance, transactions arising from gambling, betting or any such sources. However, that in no way means that the Government is legalising such activities from which these transactions are emanating.
Across the world, the stance taken by different jurisdiction have varied with respect to crypto regulations. Countries like China have resorted to a ban while many countries have declared it as legal tender. While dealing with crypto, some countries are relying upon the existing laws or making amendments or altogether enacting a standalone law. The US and Australia have issued clarifications with respect to their existing laws to accommodate crypto assets while South Korea in 2021 has made amendments to Reporting and Using Specified Financial Transaction Information Act, 2001, to bring “virtual assets” and providers of such assets within the ambit of the law.
India may have plans to enact a standalone law as mentioned by the Government earlier. The Government intends to keep a check on the assets but has not put them under any legal framework thus, we are yet to see a proper Crypto Bill and unless a Crypto Bill comes into the picture no regulated entity will be able to deal with these cryptocurrencies. It will be interesting to see what framework the Government comes up with in the future and whether regulated entities like Zerodha, Upstox, Angel Broking, etc. will be offering cryptocurrencies.
On the other hand, the launch of digital currency by the RBI can be seen as a positive and progressive step as it will give a boost to the digital economy with such a massive internet and mobile user base, India could potentially be a hub of digital currency, making it easier to track the transitions and its distributions.
Conclusion
The crypto industry has thrived in the past few years and India being a robust economy has huge potential of growing in crypto trading as the industry estimates suggest there are 15 million to 20 million crypto investors in India, with total crypto holdings of around 400 billion rupees ($5.37 billion). The Government should have invited comments from the stakeholders and considered the opinion of the experts before making such an announcement. This move of the Government has given mixed signals to the investors, firstly because the taxation is too high and might eventually result in a drop in turnover and discourage potential investors however, the positive impact is that Government has not banned the crypto.
The Government should reconsider its decision and in times to come reduce the tax slab as, despite the speculations of a ban, there has been a surge in investment in crypto. WazirX, one of the leading crypto exchange platforms, has recorded a trading volume of over $43 billion in 2021 — the highest in India — a growth of 1735% from 2020. The year 2021 was a blowout for companies trading in cryptocurrency, which indicates the fact that Indian investors are confident about the future of crypto market. As crypto may be the future of currencies, with countries like El Salvador and many more making it legal tender, any extreme step taken by the Government may impact trading and investments in the country.