Nearly a sixth of urban Indians invest in virtual tokens, showed a survey conducted by consulting firm Kantar. And, over 10 crore Indians own cryptocurrencies, the largest number of crypto owners in the world followed by the US and Russia. Cryptocurrencies like Bitcoin and Ethereum have caught on in the country, while young people are drawn to alt-coins like Shiba Inu and Dogecoin.
Not just this: there has been a spurt in the popularity of crypto exchanges and platforms in recent months like CoinSwitch Kuber, Wazir X, Coin DCX, Zebpay, Unocoin and BuyUCoin. Crypto exchange Zerodha has about 7 million users, against 11 million users at CoinSwitch Kuber and 8.3 million at Waxir X.
India can no longer turn up its nose at cryptocurrencies and adopt a conservative attitude towards this digital asset or however the government seeks to define it. Just two years earlier, India was considered to be most closed about crypto. But like the finance minister Nirmala Sitharaman told Economic Times, “India cannot act as if cryptocurrency does not exist.”
Taking into account the growing popularity of cryptocurrencies in India and the large volumes of investments pumped into this virtual asset, the Indian government, which earlier had been seriously contemplating a ban, (Reserve Bank of India has an alleged unofficial ban on it) seems to be striking the “middle path” and is working on putting the final touches to a legislation to govern this virtual asset, said media reports.
Though the demand to make crypto a legal tender may not see the light of day in India, say experts, the government seems to be seeking a ‘balance’ to address the concerns of all stakeholders.
Also read: Paytm ready to launch Bitcoin offerings if it becomes legal in India
The Indian government seems to have come a long way from a high-level government panel in July 2019 recommending an outright ban on all forms of private cryptocurrencies. It had suggested a fine of up to ₹25 crore and imprisonment of as much as 10 years for anyone dealing in them. Two years later, the Indian government is working towards making cryptocurrencies a digital asset and introducing regulations to safeguard investors, said an India Today report.
The current situation is that cryptocurrencies remain legal in India but are not regulated. It operates in a “regulatory grey area”, which makes investors vulnerable to scams and fraud. The latest suspected scam involving a meme coin from the popular Korean Netflix series, Squid Game, has rattled the cryptocurrency ecosystem in India and globally.
In the absence of any guidelines, the Internet and Mobile Association of India (IAMAI), in June 2021, had set up a formal board Blockchain and Crypto Assets Council (BACC) to oversee the implementation of a self-regulatory code of conduct for member crypto exchanges. Currently, all major crypto exchanges in India are members of the BACC, said a Quartz report.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
Meanwhile, after changing its stance on cryptocurrencies, the government has been busy working on a Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is expected to be tabled in the winter session of the Parliament. An NDTV report said that this Bill aims to first define and classify cryptocurrency according to the technology involved, after an inter-ministerial panel recently suggested that cryptocurrencies be treated as digital assets and not currency.
If the Bill is tabled and eventually passed in the Parliament, in short, it will classify Bitcoin and other cryptocurrencies as digital assets and not a legal tender. In layperson terms, this translates into a person being able to invest in crypto and hold it for long periods. However, these digital coins won’t be a substitute for the Indian rupee.
The government has already conducted detailed discussions on the pros and cons of cryptocurrencies, examined regulatory models used in other countries and studied the volume of investments made by Indian traders in such digital currencies. A presentation was also made before the policymakers, said media reports quoting government sources. Meanwhile, the Standing Committee on Finance is expected to initiate detailed discussions on crypto assets at its meeting on November 15, said an Economic Times report.
Also read: Cryptocurrency gets a boost as India’s gen-next takes a shine to it
Unless an asset is defined, ambiguity of how it should be taxed or how it should be regulated becomes a question. Experts pointed out that whether for tax or for other purposes, there has to be clarity on whether crypto assets are currency, commodity, service or closer to equity. However, the ET report suggested that cryptos are likely to attract both income tax and GST depending on the applicability. If there is gain or income from crypto, it could be taxed per capital gain rules. Similiarly, GST could also be levied if there is any service involved in the transaction.
An India Today report meanwhile said that the important regulations could be around who can create and sell cryptocurrencies in India. As of now, anyone with a working smartphone or laptop and internet connection can create a new cryptocurrency and start selling it and can make it a festering ground for scams. According to experts, India has to be cautious on this front and bring in regulation as soon as possible.
How other countries are handling cryptocurrencies
The United Kingdom does not have a comprehensive legislation on cryptocurrency regulation but it has a Financial Conduct Authority, which grants licenses to authorise cryptocurrency-related businesses, which also include crypto-exchanges. These businesses, especially those dealing in crypto futures and options trading, have to comply with a stringent set of rules.
The United States however, regulations regarding cryptocurrencies vary across States but overall the country is favourable to all cryptocurrency activities. New York, in particular, has a favourable legislative environment. Back in 2016, New York launched a framework for licensing cryptocurrency businesses and exchanges, called BitLicense. Under the system, companies looking to transmit, hold, buy or sell cryptocurrencies need to obtain a license from the New York State Department of Financial Services.
In the EU, cryptocurrencies have so far been regulated by each country, with most opting for a “soft-touch” regulatory framework. Recently, however, the EU has looked into setting up a consolidated framework on cryptocurrencies. In September 2020, the European Commission released a draft legislation titled Markets in Crypto-Assets Regulation (MiCA).
According to the draft, cryptocurrencies will be treated as regulated financial instruments. Similar to other such financial instruments, any firm holding, trading, offering brokerage services, or providing investment advice regarding cryptocurrencies will need prior approval from the regulators.