Regulation of Cryptocurrency | Timeline

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Digital Rupee is a Central Bank Digital Currency (CBDC) based on blockchain technology. It was announced during the Union budget 2022. It may seem similar to cryptocurrencies, as both are based on blockchain technology. However, there are critical differences.

Digital Rupee is a Central Bank Digital Currency (CBDC) based on blockchain technology. It was announced during the Union budget 2022. It may seem similar to cryptocurrencies, as both are based on blockchain technology. However, there are critical differences.

Epic Magazine – January Month

(1) El-Salvador is the only country where Bitcoin has been recognized as legal tender;

(2) 9 countries including China have completely banned the cryptocurrencies;

(3) Forty-two countries have banned it ‘implicitly’, wherein banks are prohibited from dealing in crypto directly or indirectly and crypto exchanges are banned. Cryptocurrencies are finding acceptance in the mainstream corporate sector e.g.,

• Goldman Sachs has started trading Bitcoin futures;
• Tesla has invested $1.5 billion in Bitcoin and plans are underway to accept Bitcoins as payment;
• PayPal had announced in March 2021 that it would allow its U.S. customers to use cryptocurrency to pay its online merchants. PayPal had also launched a service in October 2020 to enable its users to buy, sell and hold cryptocurrency;
• Big-name brands like AT&T, Home Depot, Microsoft, and Starbucks now accept bitcoin payments

”The cryptosphere needs amplified risk warnings” – Live mint – 16th Feb 22

Those against the Cryptocurrencies have often compared them to Ponzi schemes and with the Tulip mania.

Tulip Mania: It occurred in Holland during the early to mid-1600s when speculation drove the value of tulip bulbs to extremes. At the height of the market, the rarest tulip bulbs traded for as much as six times the average person’s annual salary. The term is often used to refer to a financial bubble.

Ponzi scheme: This refers to a financial pyramid that uses funds of an expanding base of new ‘investors’ to assure a smaller group of earlier sign-ups big returns. It is a fraud that usually gets exposed once it runs out of gullible folks to lure. Cash inflows fall short of promised payments, and the whole thing collapses.

The Cryptocurrency deception – Times of India – 17th Jan 22

Why Cryptocurrencies are not currency?

For any instrument to classify as a currency, it must have the following features:
– One, it is a promissory note wherein the issuer is promising the bearer or the holder a value.
– Two, it is backed by a sovereign nation and, therefore, there is never a question of any default in executing the promise.
– Three, the printing of currency in either physical or digital form is always based on some tangible asset, like gold or a basket of goods.

From the above, it’s clear that cryptocurrency can never be a currency.

Why Cryptocurrencies are not assets?

An asset is something that has a tangible value. Even if its immediate utility is intangible, an asset should have some tangible benefits.

The cryptocurrencies are nothing but gaming points.

For instance: Whenever a discussion on cryptos takes place, promoters talk of blockchain technology. This technology is just a technique to account for transactions. It has nothing to do with cryptocurrencies, except that the cryptocurrencies’ digital exchange is being maintained in blockchain format. In other words, the points which are earned through a gaming application are stored and transferred through blockchain technology.

Therefore, cryptocurrencies have absolutely no value and cannot be considered an asset.

Factly Magazine – January Month

(1) In the absence of regulation, cryptocurrencies can render fiscal and monetary policies ineffective e.g., the Government will not be able tax transactions undertaken in cryptocurrencies and there will be widespread tax evasion. Similarly Central Banks won’t be able to control supply and thus macroeconomic instability;

(2) Lack of regulation has created bubbles in cryptocurrency valuation and the prices are highly volatile. The eventual bursting of bubble will badly hurt the investors;

(3) Cryptocurrencies could be misused to launder black money or finance terrorist and other illicit activities like drug trafficking through Darknet;

(4) The environmental impact of mining cryptocurrencies is huge because mining cryptocurrencies is an energy intensive process. As per Bitcoin Energy Consumption Index from Digiconomist, (an online tool), the carbon footprint of Bitcoin is equivalent to that of New Zealand, with both emitting nearly 37 megatons of CO2 into the atmosphere every year.

Factly Magazine – January Month

(1) Unlike physical assets like land, cryptocurrencies are easily divisible, are portable (they are digital, hence no need to carry or exchange physically). Hence once legalized, they’ll quickly become medium of transaction, which will pose a challenge from the perspective of monetary policy;

(2) Cryptocurrencies are largely speculative assets. If the Government legalises a purely speculative asset, it provides a green signal to investors to invest in it and blow the bubble. When the bubble bursts, lot of investors will lose their money;

(3) Any underlying value of cryptocurrencies is only in terms of an expectation of its widespread acceptance as a medium of exchange in the future. By legalising Crypto assets, Government will inadvertently be promoting this expectation.

(4) Lack of any precedent has made it difficult to classify the cryptocurrencies. Countries are opting for bans but that also seem ineffective;

(5) Regulators and Lawmakers are not able to fully comprehend the technical aspects of cryptocurrencies and their likely impacts on the economy in general.

(6) Laws regulating or banning the cryptocurrencies are difficult to implement to ensure compliance as technology can easily bypass controls.

(7) Classifying crypto as a commodity can tackle market and compliance risks, but not illicit activities, financial stability, systemic and capital flight risks;

The Finance Minister has proposed that transfer of any virtual/ cryptocurrency asset will be taxed at 30%. No deduction except the cost of acquisition will be allowed, and no loss in transaction will be allowed to be carried forward.

Further, ​​gifts in virtual digital assets would be taxed in the hands of the recipient.

How Virtual Digital Assets (VDAs) have been defined and issues with the definition?

– Read here.

– Exception: Indian and foreign currencies have been excluded from the definition of VDAs.

Impact of taxing Virutal Digital Assets (VDAs)

“After the Budget’s ‘crypto signal’, India awaits reforms” – The Hindu – 17th Feb 2022.

Positives:

– The flat tax rate is de facto affirmation of the role that cryptocurrency and related technologies could play in India’s financial-cum-economic system in the future.

– It could also mean that down the road, the activities of Crypto startups might be legitimised and formally legalised. This would enable them to access the necessary support system, which might not have been available previously.

– High tax rate might hamper the willingness of investors to convert cryptocurrencies into the national fiat, but it may also open up more doors for technologically savvy and innovation-minded investors.

– The extremely high tax rate and the fact that the losses cannot be offset would motivate investors to look for alternative means of storing and undertaking transactions in cryptocurrencies. An inadvertent upside of this, then, is the prospective conversion and reallocation of crypto-funds from one form to another. For instance: Staking, lending and providing liquidity under DeFi (Decentralised Finance) activities.

Concerns

The community of small and medium-sized enterprises (SMEs) and lower-end high net-worth individuals is going to find it most difficult to access the DeFi ecosystem given the substantial barriers posed by the tax rates.

– Debit card or credit card holders earn reward points generated through electronic means. Generally, not taxable, but by virtue of the broad definition of VDAs, experts think that they may be taxed.

– As per the Govt, any income from the transfer of any VDA shall be taxed at 30%. But it is unclear whether the ‘transfer’ would include coin rewards for mining and staking. A mining reward, sometimes in the form of coins is paid to the miners. The coins are not paid by an entity but are won on the network. Therefore, there is no transfer or transferor per se.

After the Budget’s ‘crypto signal’, India awaits reforms” – The Hindu – 17th Feb 2022

Systemic reforms

– Reduction of tax rates in the future, by weighing in considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency.

– Introducing more rigorous regulations where appropriate

Incorporation of insights from seasoned partners from international communities

– Engaging these individuals for their insights and advice on the best practices associated with cryptocurrency policymaking.

”The cryptosphere needs amplified risk warnings” – Live mint – 16th Feb 22.

To make the public aware of risks associated with investing in Crypto assets, public-warnings need to get even louder. Suitably alerted to risk factors, people should be left at liberty to buy the tokens they want.

“INDIA’S FRAMEWORK FOR CRYPTO TAX STILL NEEDS WORK” – Livemint – 9^th Feb 22

Regarding Taxation of Virtual Digital Assets

To have a more robust taxation framework for cryptocurrencies, the government must:

– Clarify that cryptocurrencies whether recognised as legal tender in other jurisdictions or not will be covered by the definition of VDAs

– Clarify whether mining rewards in the form of coins are taxable under section 115BBH

– Notify preferably, the characteristics of NFTs that will be covered under the definition of VDAs

– Introduce the framework for taxing cryptocurrencies under goods and services tax law to offer tax certainty.

“Why most countries are unable to take a firm decision on crypto” – Times of India – 11^th Jan 22

IMF and WEF have noted that though crypto can help make cross-border payments efficient and improve financial inclusion, its operational and systemic risks mean that regulation needs to be on the global agenda.

A recent WEF report had listed four ways in which countries can deal with crypto:

– ‘Wait & see’ like Brazil

– A balanced approach like Singapore and the EU

– Comprehensive regulation like Switzerland and Japan

– Restrictive methods like Turkey and Nigeria

Taxing Cryptocurrency transactions” – The Hindu – 17^th Jan 22

Strengthening the existing international legal framework for exchange of information. This will enable collecting and sharing of information on crypto-transactions.

Training officers in blockchain technology. For example – United Nations Office on Drugs and Crime’s ‘Cybercrime and Anti-Money Laundering’ Section (UNODC CMLS) has developed a unique cryptocurrency training module.

Authorities should have access to latest forensic software (such as Elliptic Forensics Software is being used by the USA Internal Revenue Service and GraphSense used in the European Union) which can analyse a high volume of crypto transactions at a time and raise red flags in cases of suspicious transactions.