Barring a 2018 Reserve Bank of India (RBI) ban on financial services to customers who dealt in cryptocurrencies (subsequently reversed by the Supreme Court), GoI has largely left cryptocurrencies alone.
Meanwhile, the volume of cryptocurrency transactions in India has increased steadily over last few years. However, the meteoric rise of cryptos over the last two years has forced GoI to act. The pending Bill should be seen in this light.
Cryptos are viewed differently by different sections of Indian society. For the India versed with technology, flush with disposable income and an appetite for risk, cryptos represent a significant opportunity for speculative investment. On the other hand, for the India looking to invest its hard-earned income into assets that will help them beat inflation and allow them to save for the next major life event, they can be excessively volatile vehicles prone to loss and fraud.
GoI is caught in a bind between the two Indias, neither of which it can afford to ignore. On top of this, anonymous, peer-to-peer financial transactions with these non-fiat currencies challenge governmental monitoring and control on the economy, leading to worries about lost revenue, volatility, illegal asset transfer, money laundering, ineffective implementation of government programmes and mistargeted policies and planning. Unsurprisingly, many peer nations have determined that the social and political costs of cryptos are too high, and that the excessive volatility in investments can lead to erosion of public trust in government and investments, especially as lack of a sovereign guarantee makes it difficult to provide insurance against fraud.
These countries - including China, the erstwhile cryptocurrency capital of the world - have either instituted outright bans on cryptos, or put significant curbs on their promotion and growth, through bans on initial coin offerings (ICOs), cryptocurrency exchanges and advertisements. Banwagon Crypto-Locked India must, however, have a more nuanced approach to deal with cryptos. First, India cannot ignore a potentially vast source of revenue that cryptos represent.
For a country where public spending is still the primary driver of progress and infrastructure, an accepting approach to cryptos may help tap into this tantalising source. Second, heavy-handed approaches such as bans are largely ineffective for cryptos due to their decentralised nature.
When China banned cryptocurrencies in 2017, the transactions simply moved to exchanges elsewhere (especially Hong Kong and Japan) and became more difficult to regulate. Similarly, when China imposed a ban on cryptocurrency mining in April 2021, mining simply moved elsewhere along with associated tax revenue.
Current bitcoin hashrates (measure of the computational power required per second when mining cryptocurrency) are higher than what they were before the China ban. There is no reason to believe that a ban would be more effective in India - participants will simply migrate elsewhere. Third, blockchain and smart contracts - the underlying technologies behind cryptocurrencies - have immense potential even beyond decentralised banking and financial services, with applications in insurance, real estate, health records, logistics and supply chain tracking, Internet of Things (IoT) and data storage. A thriving crypto ecosystem will promote investment into these technologies and applications.
Accompanying investment into decentralised infrastructure, tools and applications may also spur innovation in other domains that require scale. The key, then, is to balance the genuine fear of excessive volatility and loss in oversight and control against the potential benefits in terms of revenue, innovation and digitisation.
The first focus area should be public education about the volatility and non-insurance risks of cryptos. Ads about cryptos should be carefully regulated. To cover costs, cryptocurrency firms should be required to invest some fraction of their profit into educating potential users and investors about the risks.
Another fraction of profit should be required to be invested in detecting and preventing crypto-related crimes, fraud, collusion and cyberattacks. Investors must be required to complete some online training about risks before transactions are allowed. The second focus area should be careful and selective regulation to encourage structure, disclosure and tracking.
Cryptos should be taxed as assets. A sale should trigger a capital gains tax. A service purchase should be taxed based on the instantaneous fair market value. Miners, traders and exchanges should pay corporate income-tax.
Let's All Open the Door Self-reporting and registration must be required for all involved. Institutions must be required to register within India and have clear KYC and record-keeping policies. Banks and financial institutions should not be allowed to hold or trade cryptos, considering their already stressed assets.
New crypto tokens and ICOs should be disallowed for now. While such instruments have the potential to accelerate innovation, the associated risks may be too high for the public without better understanding. Cryptocurrencies are likely to stay. A pragmatic approach based on education and regulation may allow exploring their potential, while safeguarding interests of those involved. ",
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