The cryptic case of the ‘crypto elephant’ in the room

While the debate on whether crypto currency is a boon or a bane is simmering in the country, IBT analyses the possible contours that cryptocurrency regulation should now take.

BY NIKHAAR GOGNA

Recently, El Salavador became the first country in the world to use bitcoin as legal tender. India, too, is not far behind in this cryptocurrency race. A report by Chainanalysis suggests that India has the second-highest cryptocurrency users in world.

Furher, 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 that crypto will never be legal tender.

At the same time, the government has maintained that only the ‘Digital Rupee’ of the Reserve Bank of India 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.

WHY REGULATE CRYPTO?

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 constituted to study the issues related to virtual currencies (2019) recommended banning of cryptocurrencies in India and imposing fines & penalties for carrying out any activities connected with cryptocurrencies in the country.

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

CRYPTOCURRENCY REGULATION: A BUMPY RIDE

2013

RBI warns the public against use of cryptocurrency

FEB 2017

RBI circular re-emphasised its concerns

END-2017

RBI & finance ministry release another warning, 2 PILs in Supreme Court

privacy; key management; volatility; 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 such transaction disputes or erroneous transactions can be resolved.

Manhar Garegrat, Executive Director - Policy and Special Projects, CoinDCX adds, “There are challenges which are unique to India; the capital control piece is very unique to India, and there is a lot of potential for scams. The thought leaders in this space and the regulators in the country need to work together to come up with a unique regulatory framework.”

CRYPTO BILL: GOOD OR BAD?

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ refers to 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.”

Some of the concerns associated with the bill are:

• Cryptocurrency may encompass various forms of digital tokens, which have not been generated through cryptography. eco-system having many paradigmchanging innovations. The industry has a few suggestions that the crypto bill can incorporate. The Blockchain Council proposes that the bill should allow room 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 believe, “Provisions that can help avoid price manipulation, monopolization & 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.

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.

• The bill ignores the fact that there are also many advantages associated with cryptocurrency.

• The penalties prescribed for certain offences under the Bill seem to be disproportionately higher compared to other similar economic offences in India.

However, there are others who believe that cryptocurrency regulation is vital for the country. For example, the US-based Blockchain Council is optimistic that the new policies of the GoI will bring in the future, fix the irregularities and issues in this otherwise revolutionary

“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.”

sharan nair, chief business officer, coinswitch

MAR 2018

CBDT submitted a draft scheme to ban cryptocurrencies

APR 2018

RBI bars various financial entities from dealing in virtual currencies

MAR 2020

Supreme Court lifts the curb

FEB 2022

Union budget proposes 30% tax on crypto games; announces digital rupee