- Date : 20/05/2021
- Read: 4 mins
Regulation of cryptocurrency is a hotly debated topic across the world. Here are some of the driving factors behind India’s proposed cryptocurrency ban and what it means for investors.
If you can’t beat them, join them. That seems to be the sentiment behind the Indian government’s recent move to launch the country’s own official cryptocurrency. A Bill to create a regulatory framework for governing the growing digital currency market is expected to be tabled in the next session of Parliament.
Since the Supreme Court overturned the ban on bitcoin exchanges holding bank accounts, they have already acquired a certain degree of legitimacy in the minds of investors. At the same time, the underlying blockchain technology is believed to be mature enough to allow secure trades via online platforms. According to the latest data, trading volumes have grown 317.2% in the last one year alone.
The time is ripe for the RBI to intervene so that the interests of Indian investors, as well as government tax revenues, can be secured. There is a lot of speculation about what the contours of the new Bill – known as the Cryptocurrency and Regulation of Official Digital Currency – might be. Let’s take a look at the possible implications of the soon-to-be-announced crypto regulations for investors.
Ban on private cryptocurrencies
What is clear so far is that the government intends to replace private cryptocurrencies in India with a digital version of the rupee issued and controlled by the RBI. If that happens, the value of bitcoin or other types of crypto assets held by Indian investors will be wiped out. Experts say that cryptocurrencies like bitcoin cannot be privately owned and should not be seen as competition to legal tender. So, a lot will depend on how the government defines ‘private’. However, there is a possibility that existing investors will be allowed time to redeem such investments before the new law goes into effect. Given the huge number of bitcoin and other cryptocurrency investors in India, this could trigger panic in online exchanges.
One of the main aims of the Bill is to make income from cryptocurrencies taxable. Existing taxation laws such as the Income Tax Act, 1961 are inadequate when it comes to bitcoin investing and, given the growing volumes, the government may want to bring it on par with other legal assets. For example, calculation of capital gains on bitcoin mining is untenable as the process of mining does not incur any cost. Secondly, it remains to be seen whether cryptocurrency is given the status of capital asset in the first place.
Money laundering and terror financing concerns
Since cryptocurrency exchanges do not fully comply with KYC norms, there is a grave risk of misuse of funds for carrying out unlawful activities. For example, KYC details are typically not verified at the time of registration or account opening. An investor is allowed to start making transactions almost immediately without their identity being confirmed. While blockchain technology is designed to provide complete transparency to the trading parties, law enforcement agencies outside the network have no way of tracking transactions to their source. This is a potential threat to national security and also a violation of data protection laws.
Creation of a national digital currency
The new Bill, once passed, will lead to the creation of a national digital currency equal in value to the rupee. This is the same approach taken by countries like China, which recently launched a digital Yuan. There is no word yet on whether it will be issued by the RBI itself, or intermediaries such as banks or private companies (which is the case currently). Another aspect that investors will be keenly watching is whether the new Central Bank Backed Digital Currency (CBDC) can be used as a mode of payment or whether it will be limited to being an investment asset. The adoption of CBDC will enable the RBI to control the volatility in prices seen in the cryptocurrency markets.
What you can do as an existing investor
It may be a while before the first draft of the new Bill is made available in the public domain. In the meantime, it is best to avoid speculation. Given that cryptocurrency investment regulation is under debate in almost all major economies, it is highly unlikely that the government will enforce a complete shutdown of private exchanges without taking investor aspirations into account. It may also consult with international agencies such as the Financial Action Task Force before deciding on the next course of action.
At present, the Bill appears to only be aimed at “facilitating a framework for the creation of a national digital currency” and allows for “certain exceptions to promote the underlying technology of the cryptocurrency and its uses”. In any case, the major thrust of the proposed new law seems to be improving Anti Money Laundering and Terror Financing (AML/TF) compliance and risk management. In the absence of further clarity, the best approach would be to wait and watch. Why you should take the ASBA route for IPO applications?