Experts have been brewing multiple speculations about the future of cryptocurrency in India over the past few years. There was a wave of hope last month when Nirmala Sitharaman, the Finance Minister of India, confirmed that the much-awaited cryptocurrency bill would be cleared soon by the cabinet.
Since there are also proposals and plans to develop a CBDC, central bank digital currency, speculations that the Indian government might ban private cryptocurrencies reemerged.
And, the latest reports (3) suggest that India is planning to classify cryptocurrencies as per-use cases. The key factor would likely be how users are utilizing cryptocurrencies for payments as an investment or utility.
Amid the crypto crisis, when most of the crypto industries worldwide were in the doldrums, Indian cryptocurrency flourished steeply following the global boom in the industry. Over the past several years, the Indian federal government kept crypto policies on hold which now appears to be softer than ever.
You will find multiple media news consistently reaping negative points about the proposed cryptocurrencies ban in India (4, 5, 6). But, if you dive further, you will see that the actual situation indicates a different narrative altogether.
There are expectations that the new bill would be tabled in the parliament winter session. Reportedly, it will treat currencies as an asset or commodity for all purposes, including taxation with proper regulations.
Indian banks have also started to ease curbs on Bitcoin purchases and other cryptocurrencies through their channels.
The Indian government seems to be ready to recognize and regulate cryptocurrencies. Is the much-awaited crypto bill finally coming this winter session? What would it mean for the Indian crypto industry’s future? Keep reading to know the full story.
The Need for a Cryptocurrency Bill
In June 2021, Bloomberg reports highlighted that the crypto investments in the country have been multiplied from 923 million USD to 6.6 billion USD between April 2020 to April 2021 (7), rolled out over 350 new crypto and blockchain startups and new crypto exchanges (8). In addition, India is also witnessing a rapid growth of its total number of crypto investors, which has now reached remarkably over 1.5 crores.
If we look at the worldwide adoption of cryptocurrencies, multiple developed nations like the US, Switzerland, Japan, France, multiple European countries, and other few Asian countries such as Singapore have started accepting some cryptos in one form or another, fully or partially structuring crypto-friendly regulations (9).
They classified these private digital currencies under multiple categories like Australia as property, liable, or property tax. In Canada, cryptos are treated as a commodity and categorized as business income. On the other hand, once a hub for over 70% of the world’s crypto mining, China has banned it and is now promoting its newly developed CBDC, Digital Yuan (10).
Now, you may be already aware of the bad share of India-China relations over the recent years. However, China’s fintech policies always impact Indian policies and the rest of the world.
In May this year, when China banned crypto mining and started the mainstream usage of its digital Yuan, the Indian government also started focusing on its techno-policies. During the same month, the RBI, Reserve Bank of India, announced developing an Indian CBDC.
At present, it is exploring multiple technical aspects concerning the scope of CBDCs in context to validation mechanism, its distribution structure, and much more. And, it is worth highlighting that it took almost seven years for China to develop its CBDC, a technically more advanced nation. Hence, a blanket ban on private cryptocurrencies when India is still designing its own CBDC may not be a wise choice.
To know more about where India currently stands on its CBDC vision, what future direction the nation may take regarding the same, and its impact on private cryptocurrencies, consider reading our previous story, Can India’s CBDC Vision Prevent Bitcoin’s Ascend?
In the past several months, the Indian parliament members had raised the issue of the crypto ban multiple times in the Rajya Sabha. Anurag Thakur, then the State Minister in the Finance Ministry (11), repeatedly answered those questions that the government has set up an IMC, inter-ministerial committee to settle the proposed ban.
According to the Bulletin, our Lok Sabha Secretariat prepared for the last budget session (12), “the cryptocurrency bill seeks to prohibit all private cryptocurrencies in India except for a few exceptions to promote the technology behind cryptocurrencies and their uses.”
The statement was quite vague and misleading. However, the crypto community has always remained hopeful, and looking at the present scenario, experts were not wrong. It seems like the scene is changing concerning cryptocurrencies.
And if you closely look at the history of the Indian government, the RBI, and their stance on these virtual private currencies, you will also agree with us.
The History of RBI’s Stance on Cryptocurrency
In April 2018, the RBI had released an order to banks and asked them to suspend their transactions and dealings with the crypto industry. Several lawsuits challenged the decree multiple times in the Supreme Court. Ultimately, the apex court quashed the RBI’s forced restriction on banks, passed the judgment in favor of the crypto industry in 2021, and asked the banks to resume their services to crypto companies.
However, RBI was still reluctant to issue clear guidelines to the banks, and hence, multiple banks were still declining services to entities dealing in cryptos. Until April 2020, when B V Harish, the co-founder of an Indian crypto exchange, sought a PIL and asked the RBI to clarify its stance on cryptocurrencies (13, 14).
In response, RBI finally clarified that no such prohibition on banks exists after the apex court’s verdict. The RBI clarification served as a huge booster to the Indian crypto industry.
The government was supposed to table the crypto bill in January 2020. In March, authorities even conducted multiple rounds of discussions regarding the regulatory structure for private digital currencies. However, the unforeseen circumstances with the COVID-19 pandemic prolonged the procedure.
Now, when the crypto industry is booming, it appears that the regulatory bodies are freshly formulating new and positive amendments.
The Indian crypto community has been getting stronger than ever over the past few years. The industry leaders consistently run social media campaigns, arrange meetings with the FM, seek to change the government’s stance on the crypto industry, and publicly ask for a positive regulatory structure.
To know more about the government’s stance on cryptocurrency and its regulatory history, consider reading our previous story, Is There Still Hope For Cryptocurrency in India?
Cryptocurrency as Commodities
According to a recent ET report, citing three people aware of the matter, the government of India is planning to outline cryptocurrencies as commodities and categorize them based on their use cases.
It appears that our government is looking to treat cryptocurrencies as an asset or commodity to clarify multiple purposes such as taxation and would consider them according to use cases such as investment, utilities, and payments.
It is also worth highlighting that it would be the first time our government categorizes cryptocurrencies. And instead of classifying them based on the underlying technology, authorities are focusing on the end-use of digital currency for regulatory purposes. It is a rising hope that instead of banning private virtual currencies, the government might be looking to outline these assets for regulatory purposes such as tax treatment and give them a clear definition for accounting books.
Here is what the sources of the matter said to ET, “for its upcoming draft bill, the government is working towards defining cryptocurrency and its treatment based on use cases so regulators can use them correctly in account books and appropriate levy taxes. “
And if the government is looking to legalize cryptocurrencies in the country, the move makes sense. Because there is no clarity on what cryptocurrencies are. Are they equity? Commodity? Currency? And unless the government finally defines the asset, the regulations and taxations of these cryptocurrencies will always remain ambiguous.
In short, if the government is looking to implement any regulations and taxes on cryptocurrencies like Bitcoin or Etherum, first, it must outline them and define them.
“We can either categorize crypto-assets based on their underlying technology or their end-use. Therefore, before discussing their regulations, the Indian government would need to outline what they mean by cryptocurrencies,” said sources to ET.
It should also come as no surprise. Not long ago, ET had reported that leaders in the Indian crypto space had made several suggestions to the government regarding the regulations of cryptocurrencies in the country. Their idea includes introducing a system to register domestic crypto exchanges regulating them as digital properties, define insurance norms, accounting, KYC, other criteria, and more.
It seems like the government is considering these suggestions and rethinking its stance on the same. We can only hope for the best.
Plus, it is also wise to consider the end-use of digital currencies instead of their underlying technologies. As Jaideep Reddy from the legislation agency Nishith Desai Associates puts it (14), “there are more than 5k different cryptocurrencies worldwide. Each of them carries its distinct characteristics. Hence, it would be a smart choice for India to tailor the surrounding regulations as per end-use or activity of a particular token rather than the underlying technology alone.”
At the same time, sources mentioned that the government would likely ban cryptocurrencies from being traded if they fail to fall under their definition. The authorities may then apply taxes on allowed cryptocurrencies comparable to an STT, safety transaction tax on purchasing or selling them.
In addition, if the government categorizes crypto assets like commodities, they may also tax on their returns as regular revenue or enterprise revenue, said the sources.
Crypto Trading in India
Crypto assets, praised as the most important asset type of the 21st century. Currently, over 1.5 crore Indians hold over 1,500 crore INR worth of crypto tokens (15).
The Indian government’s decision to classify cryptocurrencies as per their use cases will further boost the adoption of virtual currencies in the country, which, as we mentioned above, is already seeing excellent momentum.
The FM recently stated that she is awaiting the cabinet’s approval on the cryptocurrency bill. The inter-ministerial panel for cryptocurrency under the chairmanship of the Economic Affairs Secretary to study the issues regarding virtual currencies has submitted its report (16).
We will see new details emerging as we move forward while adopting cryptocurrencies is rapidly gaining in the country. As we mentioned, the investment in digital tokens increased from about 923 million USD in April 2020 to 6.6 billion USD in May this year. That’s more than 600% growth in 13 months!
As per the latest statement by Chainalysis, a blockchain data platform, India currently is in the 2nf position out of 154 countries in terms of cryptocurrencies adoption (17).
Even though Indians own less than 1% of the world’s Bitcoin to date, the country has over one crore of crypto investors, and the number is significantly increasing every day. New investors are coming in, people are getting more curious about cryptocurrencies, and new domestic crypto exchanges are emerging. And the impulse is revealing no sign of slowing down.
The RBI is also set to roll out its first digital currency trial program by the end of 2021, as per the governor, Shakrikanta Das.
As of writing this story, Bitcoin is hovering at about 50k USD market with a market cap of about 942 billion USD. Most of the other popular cryptocurrencies are also trading in the green (18).
Read Also: Payment Methods: What Lies in the Future?
Cryptocurrencies are rising in India, no doubt about it. And, we strongly believe that it is the right time for the Indian government to call for appropriate and quick regulations as the adoption of such technologies increases.
At the same time, we are not very confident about the fundamentals that drive the valuations of cryptocurrencies such as Bitcoin, which is currently trading at a price near 50k USD. Yes, Bitcoin has scarcity but comparing it to gold! Seriously?
The asset prices are picking up, and people value cryptos as assets and not as a means of payments. Yes, sure, they can have a valuation, but what is their fundamental backing?
The way we look at it, cryptocurrencies were primarily made to evade authorities. So, instead, seeing them as a means to replace fiat currencies, we should focus on their use cases. As we evolve our technologies, we can count on these systems going forward. Now, their valuation seems to make much more sense!
FOMO could also drive the recent sparkle in cryptocurrencies in the country. And we believe that we can unlock the potential of cryptocurrencies with evolving technologies like metaverse and novel use cases, where they can become effective instruments.
Another area we see is cross-border payments. They are traditionally marred with high transaction costs and downtime; it is another potential area where cryptocurrencies shine. Even though cryptos may be riskier today because of their value fluctuations, we are confident India should not lay a blanket ban on these emerging tokens.
The value of these cryptos will emerge as they find appropriate use cases, and there is enough evolution around technology right now to make it happen!
What do you think? Let us know your thoughts and opinions in the comments below!