The exponential growth of the cryptocurrency in India was just a phenomenon until it was given a considerable attention by the government. Taking a conservative stand on the taxation of digital currency, Finance Minister Nirmala Sitharaman on Tuesday announced that government would earn 30% behind every penny of profit earned by way of transfer of virtual money. Also, to minutely capture the crypto transaction details, the Union Budget 2022 introduced 1% of tax deduction at source (TDS) for every transaction beyond a threshold limit.
Giving a legal status to crypto assets, the government further said that it would come up with a new digital rupee issued by the Reserve Bank by 2022-23. The Central Bank Digital Currency (CBDC) once traded would be powered by the block chain technology and will remain permanent. Though the blockchain technology will allow to record the CBDC transaction in a transparent manner, the traders won’t be allowed to revise or change the authenticate record, the Budget read.
#WATCH | FM Nirmala Sitharaman speaks on proposed Digital Rupee & cryptocurrencies: What RBI will issue is a digital currency. Everything that prevails outside of it is assets being created by individuals & we are taxing profits made out of transactions of those assets, at 30%. pic.twitter.com/acVOktqosH
— ANI (@ANI) February 1, 2022
Of the key issues yet to be analysed, government charging 30% tax on income from cryptocurrency is a big proof of the shift in the centre’s outlook on the legitimacy of the digital currency. This is because though the study of the dynamic behavior of the cryptocurrency is under process, the Centre already is looming to charge a little over 1 million crypto traders with such bulky rate. Whereas, more than 15 million share traders are accountable for just 15% to 20% tax on dividend, depending on the taxable income and filing status, that remains unchanged.
While India initially had pledged to impose complete ban on dealing in crypto assets, policy direction based on Budget 2022 and statements by government officials now appears to be moving towards regulating crypto assets. Let’s look at how the financial mechanism of India is on the verge of shift and swap catering to the current 9.6% estimated growth factor-
What is cryptocurrency?
A cryptocurrency is a digital form of currency secured by cryptography that can be circulated without the need for a central monetary authority such as government or a bank. The cryptographic technique used in creation through decentralized financial network enables people to exchange them securely for any goods or services.
At the core of functionality of cryptocurrency is the block chain technology which is a set of connected blocks or an online ledger. Being highly secure tech, it demands every single node of the entire network to agree upon the computer maintained copy of the ledger.
How many number of cryptocurrencies are there?
According to the CoinMarketCap, there are more than 17,000 different cryptocurrencies that are traded publicly and continue to proliferate. The total value of all cryptocurrencies as on January 28, 2022 was about $1.7 trillion, having fallen substantially from an all time high above $2.9 trillion late in 2021.
The most popular trading cryptocurrencies by market capitalization as tracked by the report are Bitcoin ($717.5 billion), Ethereum ($303.1 billion), Tether ($78.2 billion), BNB ($63.6 billion), USD Coin ($49.6 billion), Cardano ($35.4 billion), XRP ($29.2 billion), Solana ($28.9 billion), Terra ($20.3 billion) and Dogecoin ($18.8 billion).
The launch of the Central Bank Digital Currency in India
The Reserve Bank of India has been a staunch opponent of crypto since 2013. Four years after the world’s first crypto currency, bitcoin was launched, the Reserve Bank of India had opposed to legalize its financial status in India citing the economic and security risk involved. The opposition became stronger only when it stated the need for ‘complete ban’ on crypto and ordered banks not to facilitate it. A Supreme Court ruling in 2020, however, set aside the central bank’s order.
The regulator was worried that the usage of digital currency could undermine its entities and destabilise the economy until yesterday when it approved the launch of CBDC by 2023. The move comes amid the government’s plans to introduce a Bill on cryptocurrency that seeks to prohibit all private cryptocurrency in India with certain exceptions. What makes CBDC different from decentralized virtual currencies and crypto assets is that it will probably be backed by the state and will no more lack the legal tender status. It will enable the users to conduct both domestic and cross border transactions which do not require a third party or a bank to approve.
It is important to note that India is not the only country who would launch digital currency. Last year in October, Nigeria launched eNaira along with CBDCs lofted in Bahamas and five other islands in the East Caribbean.
The need for regulation of cryptocurrency system
Virtual Currencies are not fiat currencies but basically collection of binary data stored using cryptography to secure the transaction records. They are distributed over a vast network of computers and cannot exceed a certain limit. For instance, there are only a 21 million bitcoins issued and as the demand for these increases, so does its value. It works on the principle of demand and supply, as applied in the securities.
The transaction cost while using the crypto currencies is also reduced as the third party commission like that of Visa or Master Card is totally cut down. They can be stored in a digital wallet, which can only be accessed by a private key. The most significant advantages of crypto is that they can be mined by a computer that involves a process of solving arithmetical problems or algorithms, which are used to verify transaction blocks to be added to the block chain. One can also use a computer to validate these transactions and, as a reward, receive a cryptocurrency.
While crypto already has these many advantages, the only reason why the India has proposed to regulate digital coin is privacy. The block chain technology used by crypto currencies is highly secure, therefore, the Government finds it challenging to trace the origin and keep record of a private crypto transaction. Another important concern is that crypto is not supported by any commodity and has potential risk of loss in values if the promoter of the crypto stops trading activity.
Are digital currencies also good mode of investments?
While digital currencies promise to streamline the existing financial architecture to make it faster and cheaper, there reportedly are two ways in which a user can deal in them- one is as typical currency and other as the security investment. The digital currency can either be generated or bought via a software (wallet) that contains partial or full history of transactions that have occurred in its network. But holding crypto as investment is of major risk due to the price volatility issue involved.
The recent instance of the Squid Game Crypto Scam is a big slap on face of those who see crypto as investments. Reports mention that the promoters scammed an estimated $ 3.38 million, by drawing in buyers and thereafter stopped trading, leaving the buyers with tokens which had no financial value there after.
Investors usually are seen rushing around to buy or invest in cryptos as they presumably think cryptos might become more valuable. But for those who see cryptocurrencies such as bitcoin as the currency of the future, should also think upon ‘currency needs stability’ theory.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
The government last year had proposed to table the bill to ban all the private cryptocurrencies in India but could not make it to the Budget this year. As the crypto trading platforms are witnessing substantial jump in volumes, the bill ideally serves to introduce a level of uniformity of understanding and providing security, also preventing misuse of the virtual currency.
However, the penalties prescribed under the bill seem to be disproportionately harsher when compared with similar economic offences. The fact of the matter remains that as with any other system, there exists an inherent risk in CBDCs too. Introducing a digital rupee might be of a benefit when single window regulation is thought through but concerns regarding price volatility need to be addressed clearly by the government.
According to a recent report, WazirX, India’s biggest Cryptocurrency exchange registered an annual trade of over $43 billion. If the government had pre-plans to charge 30% tax on earnings from crypto assets, it would have been a win-win situation for the traders and the government if no ban was incurred in first place. The Indian cryptocurrency market is expected to reach up to $241 million by 2030 in India and $2.3 billion by 2026 worldwide.
