The Indian government is moving toward introducing a cryptocurrency regulation as key stakeholders seek clarity from the government on issues of definition, tax treatment, and regulation.
Government to Introduce Bill to Ban Private Cryptocurrency
On 23 November 2021, Lok Sabha, the common house of the Indian Parliament, announced a bulletin regarding conduct of business during the winter session. Among the 26 new bills tabled, a bill to ban all private cryptocurrencies in India has also been proposed.
The bill entitled “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021,” intends to “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India (RBI). The Bill also seeks to prohibit all private cryptocurrencies in India. It does, however, allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
This announcement sent shockwaves throughout the digital currency market, with investor panic causing all major cryptocurrencies to decline 15% and more, with Bitcoin down by around 18.53%, Ethereum by 15.58%, and Tether by 18.29%.
While the bulletin remains silent on the details of the bill and fails to clarify what private cryptocurrency refers to, it also leaves several questions unanswered about the future of existing crypto investments in India. Amid this ambiguity, around 15-20 million crypto investors in India, with total crypto holdings of around INR 400 billion (US$5.39 billion), find themselves in a state of uncertainty.
Recent Developments Give Insight Into Government Stance
Indian Prime Minister Narendra Modi, who delivered the keynote address, spoke about the need for international solidarity and order to regulate cryptocurrency while representing India at the Sydney Dialogue held on 18 November 2021.
“It is important that all democratic nations work on this and ensure that it does not end up in wrong hands, which can spoil our youth,” Modi said.
The Sydney Dialogue is an annual summit where global leaders discuss emergent cyber and critical technologies and its impact on world economies.
On 13 November 2021, India hosted a comprehensive high-level meeting chaired by Modi to discuss the future of cryptocurrency in India—with participation from the RBI, Ministry of Finance, and Ministry of Home Affairs. The main agenda of discussion was the unregulated cryptocurrency market in India, which has experienced unprecedented growth in the past year. Members engaged in intense deliberations on the potential impact of an unregulated cryptocurrency market in India. RBI governor Shaktikanta Das flagged unregulated cryptocurrency as a major threat to India’s economic and financial stability and demanded a complete ban.
However, the government displayed a more optimistic approach towards regulation of cryptocurrency in India, with Modi ruling out the possibility of a total ban. Modi, however, expressed concerns about how the unregulated crypto markets are becoming potential avenues for money laundering and terror financing. Modi added that for these reasons, suitable legislation is needed to address crypto markets.
Previous Speculations About Expected Cryptocurrency Bill
The Economic Times reported that India’s federal government is working on introducing a cryptocurrency bill. Indian Finance Minister Nirmala Sitharaman said that she is awaiting an approval from the Cabinet on the cryptocurrency bill. The proposed legislation is expected to define cryptocurrencies in India and will compartmentalize the respective and currently unregulated digital currencies based on their usage. Meanwhile, the inter-ministerial panel on cryptocurrency under the Chairmanship of Secretary (Economic Affairs), formed to study issues related to virtual currencies, has submitted its report.
This anticipated legislative development is timely. At present, there is no uniform definition for crypto assets in India, which the government believes creates risks for users, investors, and authorities. The lack of uniform definition poses regulatory challenges for taxation, financial security, and monitoring, etc., which have been repeatedly flagged by the RBI. Investment in cryptocurrencies grew from nearly US$923 million to US$6.6 billion in India between April 2020 to May 2021.
Overall, the cryptocurrency bill’s expected objectives—according to expert observers—will regulate cryptocurrencies for taxation purposes so that they can be treated correctly in the books of accounts. The scope of this bill does not cover the recognition of digital and virtual currencies as mediums of payment and settlements; rather, its ambit is expected to look only at how to regulate the recognized cryptocurrencies.
How Will Cryptocurrencies Be Defined in India?
The Economic Times reports that cryptocurrencies like Bitcoin, Ethereum, and Tether will be treated as assets or commodities for all purposes, including taxation and other utilities like payments and investment.
It is pertinent to note that only government-approved cryptocurrencies will be allowed to be traded in India once the bill is approved.
The draft bill will possibly address concerns and ambiguities regarding the tax incidence on cryptocurrency assets in India, which presently persist due to lack of relevant regulations. It is also being speculated that the government may also introduce a security transaction tax (STT) on the trading of cryptocurrencies.
Currently, there is no clarity from the government on whether cryptocurrency should be treated as a commodity, currency, service, or capital asset. Due to the absence of a dedicated and defined cryptocurrency law, it is also feared that government tax revenues have not been realized to the full.
Categorization of Cryptocurrencies
Reportedly, the compartmentalization of these cryptocurrencies will be done on the basis of the technology employed and “as per use case.” In other words, the government will categorize cryptocurrency assets based on their end-use.
What Stakeholders Are Saying
As India leapfrogs to attain second place globally in terms of cryptocurrency adoption, cryptocurrency exchanges across India have come together to lobby for a cryptocurrency regulation law.
According to reports, these exchanges have sent their representation to the government with various suggestions regarding the regulation and future usage of crypto assets in India. One of the proposals demands that crypto tokens be treated as a digital asset and not as currency.
They have further sought clarification on policies with regards to exchange ownership parameters, KYC, accounting and reporting standards, etc. and have called for a system for introducing home grown assets.
At present, India is trading more than 5,000 different cryptocurrencies and each one has different technological features and legal characteristics. A technology law expert at Nishith Desai Associates highlights the need for a tailored regulation keeping in mind the end usage of every particular type of token.
This article was originally published on 3 September 2021. It was last updated 24 November 2021.
This article was first published by India Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to [email protected] for more support.