Cryptoassets: regulation in the air?

Cryptoassets: regulation in the air?

Context:

• Despite repeated cautions by the Reserve Bank of India and the Finance Ministry about the risks associated with investing in cryptocurrencies ,  and their illegality when used as actual currency, the crypto-industry is still pretty enthusiastic about India and maintains that even the government’s negative stance has been exaggerated.

Background:

• The RBI has issued three warnings about cryptocurrencies since 2013, and the Finance Ministry in December issued a strongly-worded notice likening crytocurrencies to Ponzi schemes and emphasised that buyers and investors were risking their money by investing in these products.
• Finance Minister Arun Jaitley’s Budget speech again reiterated the government’s position that cryptocurrencies were not legal tender and the government would look to curb any illegal transactions and financing using these digital currencies.

Legal or not?

• The government had declared cryptocurrencies illegal.
• Even foreign currencies in the country are commodities and not legal tender.
• In a panel discussion, Economic Affairs Secretary Subhash Chandra Garg, said that they were looking at a regulatory framework.
• The government was not comfortable with the words’ coin’ or ‘currency’ because these are not legal tender, so wanted to call them ‘cryptoassets’.
• The industry body representing most of the blockchain and cryptocurrency companies in India agrees with this assessment.

RBI’s report:

• Recently, the RBI came out with a report on the fintech sector, in which it dedicated a section to digital currencies (DCs).
• It went into the modalities of such currencies and also their future potential, an indication that the RBI was not totally closed to the applications of digital currencies.
• The implications of DCs for financial firms, markets and system will depend on the extent of their acceptability among users.
• If use of DCs were to become widespread, it would likely have material implications for the business models of financial institutions.
•  DCs could potentially lead to a disintermediation of some existing payment services infrastructure.

Income Tax Department issued notice in this regard:

• The Income Tax Department this year sent one lakh notices to people who invested in cryptocurrencies and whose investments didn’t match their income profile.