The Union government has been working on a consultation paper for crypto assets and is nearing completion, according to the Secretary of Department of Economic Affairs Ajay Seth. He informed reporters that the consultation paper is “fairly ready” and called it a “deep dive”, but stopped short of divulging when the paper will be out.
Why it matters: A consultation paper on crypto assets will reveal the government’s position on crypto assets and how it intends to regulate them. It also suggests that a law might still be at least a few months away from promulgation.
When will it be released: Although Seth did not state when the paper will be out, the government intends to release the paper in August this year, according to a report in Economic Times.
- It is important to note that this means a law on regulation of crypto will take time as legislators will look to incorporate the feedback on consultaiton paper into the draft of the law.
- Seth also confirmed that law will take time because India is waiting for an international framework on crypto assets, ET reported.
Who were consulted: Seth suggested that the government consulted many “domestic and institutional stakeholders”. But it did not stop at these stakeholders as organisations like the World Bank and International Monetary Fund were also approached for input.
What else did Seth reveal: The government is also looking to forge global consensus on regulations around crypto and has begun work towards the same, Seth informed reporters. It is also exploring India’s role in coming up with the regulations.
Why is India seeking global consensus: Indian Prime Minister Narendra Modi had called for all nations to cooperate on the issue of crypto assets as every global agency will need synchronised action to tackle them.
- Modi added that the kind of technology associated with cryptocurrency renders decisions taken by a single nation as inadequate.
- He also referred to cryptocurrency as a challenge on par with supply-chain disruptions, inflation, and climate change.
- Modi was speaking at the 2022 World Economic Forum’s annual Davos conference.
Does this mean India is banning cryptocurrency: Seth did not clarify whether India is going to ban cryptocurrency but stressed the need for global support, as per CoinDesk.
- “Whatever we do, even if we go to the extreme form, the countries that have chosen to prohibit; they can’t succeed unless there is a global consensus,” he was quoted as saying.
- Seth explained that a broad framework and participation of all countries was necessary irrespective of a country’s stance on crypto assets— a ban or a regulation.
How has India dealt with crypto currencies so far: Even though a regulatory framework on cryptocurrencies is nowhere in sight, Finance Minister Nirmala Sitharaman imposed a 30 per cent tax rate on income accrued during transfer of virtual digital assets.
- She also announced a one per cent Tax Deducted at Source (TDS) effective from July 1 which did not go down well with the crypto industry.
- The Union government also made clear that cryptocurrencies such as Bitcoin, Ethereum, or NFT will never become legal tender.“Crypto assets are assets whose value will be determined between two people. You can buy gold, diamond, crypto, but that will not have the value authorization by the government,” the finance secretary said.
- The new provisions do not allow any losses to be set-off against income from other crypto transactions.
- The finance minister also said that the gift of virtual digital assets will be taxed in the hands of the recipient at 30 percent.
- Sitharaman also reiterated that the imposition of taxes does not mean that the government is moving to regulate crypto assets. She clarified that a tax regime for crypto did not categorically rule out a ban categorically.
What has been the impact of these new tax provisions: The new tax rate came into effect from April 1, 2022. Many in the industry called it steep and prohibitive especially for a nascent industry.
- Trading volumes on crypto exchanges like WazirX, ZebPay and Giottus hit a six-month low on April 10, according to the Economic Times.
- WazirX, one of the largest cryptocurrency exchanges in India, saw an erosion of 65-90 per cent of its business after Mobikwik disabled its services on the platform, ET added.
- CoinDCX also witnessed high volumes on March 31 as people squared off their positions before the new tax rate came into effect.
What is RBI’s stance on crypto assets: RBI officials have been staunch opponents of regulating cryptocurrencies. They have advocated for an outright ban.
- RBI Governor Shaktikanta Das likened the craze around crypto to ‘Tulip mania’ and went a step further to say that crypto is worse than tulips. Das added that cryptos do not even carry the value that tulips carried at the height of Tulip mania.
- Deputy Governor T Rabi Shankar suggested that India should ban crypto as it is the most advisable option before the government. He added that cryptocurrencies cannot be defined as a currency, asset, or commodity and carried no underlying cash flows or intrinsic value.
What are the issues that the consultation paper must address: There are several issues before the government that it must address in order to provide stability and clarity in the sector. Here are some of them:
- Ease of Payments: The paper should look to iron out kinks between banks and crypto exchanges over ease of payments. It is one of the most critical issues as exchanges regularly complain of a breakdown of payment mechanisms such as UPI and deposits.
- Diversity in Classification: There are a wide variety of crypto assets with different use cases such as currency, token, utility, or memes. It should not opt for a one-size-fits-all classification.
- Clarify who will regulate: It should seek to answer the following— Who will regulate? Crypto assets move across borders seamlessly making it difficult for regulators to ascertain jurisdiction.
- Ban or Regulate? It should also address the question of whether the government wants to ban or regulate the sector.
- Sandbox regime for innovation: The paper should pave the way for a sandbox regime for crypto intermediates and Web3 start-ups to try out different innovations without the burden of regulations to explore blockchain potential.
- Focus on interoperability: The government must also find a way to ensure interoperability between private cryptocurrencies and central bank digital currencies. It should also address stablecoins and how they will be regulated.
- Address RBI’s concerns: Central banks do not like decentralised finance because it undermines their control over monetary policy so the paper should look to alleviate these concerns.
- Framework to prevent misuse: It must come up with a framework which prevents cryptocurrencies to be used to fund terrorism and facilitate money laundering.
- Tax evasion concerns: There are also uncertainties around tax evasion which the paper should look to address and ensure only legitimate exchanges are present in the market.
- Consumer awareness and protection: The paper must put checks and balances to address lack of consumer awareness and spurious advertising.
- Investor interests: It should seek to come up with a few investor protection norms so the market is not the wild west for retail investors.
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