The Crypto market has been going through a challenging phase over the last several weeks. The market took a huge plunge, and crypto coins lost as much as 30 per cent of their values in a single day. However, along with these global volatilities, several developments have been worrying the entrepreneurs and investors. With not-so-positive statements from high-level decision-makers and government and criticism at the international business forums for cryptocurrencies, will it impact building an encouraging ecosystem for entrepreneurs and investors?
India has a large crypto community who have invested along with the Crypto curious, closely monitoring the market. And these developments are certainly not positive.
1. Government’s continuous negative sentiments for cryptocurrencies
The government’s stand has not seemed to move at all, not even an inch. Some recent high-level statements were so direct that they did not require any interpretations. They continued to reflect the government’s stand on challenges to legalizing the currency.
Last week, the Minister of Commerce & Industry, Consumer Affairs Piyush Goyal, highlighted those unregulated cryptocurrencies could not provide an alternate payment mechanism. In an interview with India Today TV, he said the government is engaged with blockchain technologies in a big way. “In terms of crypto, the world has realized that it is not something that one can just accept without due diligence and proper regulatory policy in place,” Piyush Goyal said.
He further added, “With the current meltdown of cryptocurrencies, the world today is recognizing what we (the Indian government) recognized much before. That these unregulated cryptocurrencies are not good for the Indian ecosystem.”
2. Can RBI ever change its skepticism about crypto?
Probably not. Not even a single instance when the Reserve Bank of India (RBI) has not spoken against the crypto. In fact, in a look-back at Cryptocurrency’s regulatory journey in India since 2013, RBI has been and continues to be active and very outspoken about its scepticism about cryptocurrencies. There are several times RBI has cautioned the users, holders and traders of virtual currencies about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to.
Not long back in March 2022, RBI’s Deputy Governor, T Rabi Sankar said that cryptocurrencies are very much like a speculative or gambling contract working like a Ponzi scheme. In fact, it has been argued that the original scheme devised by Charles Ponzi in 1920 is better than cryptocurrencies from a social perspective.
Earlier last week. referring to cryptocurrencies, RBI’s Governor Shaktikanta Das statement in an interview on CNBC TV18 was equally discouraging:
This is something whose underlying (value) is nothing. There are big questions on how do you regulate it. Our position remains very clear, it will seriously undermine the monetary, financial and macroeconomic stability of India.
We have been cautioning against crypto and look at what has happened to the crypto market now. Had we been regulating it already, then people would have raised questions about what happened to regulations.
3. No concrete solution to risks that crypto poses to AML/CFT
Anti-money laundering and counter-terrorist financing (AML/CFT) measures are to stop criminals and terrorists from abusing the financial system. Since cryptocurrencies and digital assets are private and decentralized, it is often difficult to trace and keep track of the transactions. The International Monetary Fund (IMF) is therefore assisting countries in their understanding and mitigation of the money laundering, terror financing, and financing of the proliferation of weapons of mass destruction (PF) risks related to virtual assets.
However, there are several cryptocurrency companies that believe in keeping finances confidential and secure. Monero, Zcash, DASH, Verge and Horizen provide their users with maximum privacy and it is almost impossible to trace the parties involved in the transactions.
IMF’s Gita Gopinath, in an interview with India Today TV at Davos reflected negative sentiment on the digital currency. “It went from about $3 trillion market to $1.5 trillion market in about six months – very quick moves. It is not a very easy-return investment. So these are very large risks you are taking,” she said, pointing out the risks involved with the digital currency”, she said.
Finance Minister Nirmala Sitharaman at the spring meeting of the IMF called for regulating cryptocurrencies. She also stressed the risks posed by cryptocurrencies and unhosted wallets in enabling money laundering and terror financing.
Mr T Rabi Sankar, Deputy Governor, RBI during a keynote address on February 14th, 2022 – at the Indian Banks Association 17th Annual Banking Technology Conference and Awards also expressed similar concern about CFT/AML:
The very raison d’etre of cryptocurrencies is that they bypass established intermediation and control arrangements7 that ensure integrity of financial transactions, such as Know-Your-Customer regimes, Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) rules etc. The fact that they are anonymous, decentralized systems that operate purely virtually makes cryptocurrencies particularly attractive to illegal/illegitimate transactions which have been largely filtered out of the formal financial system. Total crimes using cryptocurrencies in 2021 was estimated to be $14 billion (Wall Street Journal, January 06, 2022). The amount itself is not much but the implications for the AML/CFT framework built painstakingly over the last two decades is rather substantial.
4. High taxation for Indian crypto investors and now Reverse GST on foreign exchanges
As per the last budget session announcement by the Finance Minister Ms Nirmala Sitharaman, from April 1, 2022, income from the transfer of cryptocurrencies is taxable at 30 per cent. Such income will be taxable even if taxpayers’ total income is below the threshold limit of Rs 2.50 lakh. This is applicable to gains from cryptocurrency and NFTs as well. Further, loss from the transfer of virtual digital assets cannot be set off against any other income.
To capture the transaction details, the government has also provided for TDS on payments made in relation to the transfer of virtual digital assets at the rate of 1 per cent of such consideration above a monetary threshold. The gifting of a virtual digital asset is also proposed to be taxed in the hands of the recipient.
The media has recently reported that the government is planning to introduce a “reverse charge” tax for transactions in virtual assets on overseas platforms. This will apply to foreign cryptocurrency exchanges such as Coinbase, Binance, and Bitfinex, which are doing business in India. This could be taxed at 18% on the commission earned through transactions. The homegrown cryptocurrency exchanges have been paying 18% GST on the commission that they charge from traders.
5. No clarity on Policy
Last it was heard that the government is working on a proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. Throughout 2021, it was expected the bill would appear on the agenda – the Monsoon as well as the Winter Session of Parliament. However, the government did make some progress in terms of consultation with Crypto and tax experts. The finance ministry formed a new committee to analyze if the incomes generated from trading cryptocurrencies could be taxed as capital gains or would they need to be classified under a newly created tax category.
In the. Budget Session of 2022, the government had listed 15 new bills, however, the Cryptocurrency and Regulation of Official Digital Currency Bill did not appear. On the other hand, in February, Finance Minister Nirmala Sitharaman said in Parliament that the government has not done anything to legalize or ban cryptocurrencies at this stage. “We have only taxed the profit emanating from the transactions,” she has been quoted in media.
There are no updates on the proposed Regulation as of now.
What does it mean for India?
Industry experts believe that such delays may slow down the evolving industry and India may lose its chance to become a global hub for the crypto industry. There are several developed and matured markets that have adopted the currency long back and are now working on processes and regulations to streamline it. They are respecting the growing interest in virtual currency among the people, especially the young population, and the ever-growing value of digital assets. There are some smaller countries including El Salvador and the Central African Republic have adopted Bitcoin as legal tender.
Several foreign major crypto companies like Coinbase, Binance, etc. have shown interest in investing in India. Global Investors continue to support Indian Web3 and crypto start-ups. The opportunities are enormous in India, According to a report by Chainanalysis, India had the world’s second-largest number of cryptocurrency users in 2021. The report stated that the country was second only to Vietnam in terms of cryptocurrency users.
Experts fear that in absence of any concrete support from the government machinery and lack of regulation, India might see a brain drain and exile of Indian talents to countries that offer a supportive ecosystem.