India’s cryptocurrency ecosystem is eagerly hoping for a hint of regulation from the government come Feb. 1, 2022.
India’s Finance Minister Nirmala Sitharaman will present the nation’s budget at the beginning of the month, considered the most important financial day of the year for the world’s largest democracy.
The speech sets the financial tone for the year, indicates how government resources will be allocated, how taxes will be regulated, which welfare policies will be introduced to reduce wealth inequality, which sector will be aided to boost growth and most importantly, it reflects the government’s balance sheet and therefore tells the state of the economy.
It is possible that cryptocurrency policy gets a mention or more. It is equally possible that the government avoids revealing any new policy or even any mention.
“Cryptocurrencies don’t give votes,” said one policy expert, who requested anonymity because they work closely with the national government. The individual suggested the speech would be populist in nature, geared towards making goods and services cheaper to appease voters ahead of this year’s elections.
“The budget speech is roughly two hours. There are a lot of things to be said. Five states are going to elections. This might not be a priority,” the policy expert said.
Voting in the five Indian states starts nine days after the budget speech. This includes Uttar Pradesh, the most-populated state and therefore the most important for the national government.
In the highly unlikely scenario Sitharaman does reveal fresh crypto policy, the proposed rules would need to pass through parliament as legislation and become law. Therefore, it is still unlikely the crypto-sphere will see any immediate regulation implemented.
What have the last budgets said
India’s finance minister has mentioned crypto and blockchain in the past on multiple occasions.
On No. 30, she told Parliament that “a new [cryptocurrencies] bill is in the works,” warning that “the risk of cryptocurrency and it going in the wrong hands is being monitored.”
She did not know how much tax had been collected on cryptocurrency transactions at the time.
However, mentions of cryptocurrencies in the budget speech have declined.
The budget speech has gone from saying “the government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these cryptoassets in financing illegitimate activities or as part of the payment system” and saying “the government will explore use of block chain technology proactively for ushering in digital economy” in 2018 to no mention in 2019, 2020 or 2021.
“You can never guess what the government will say in the budget speech,” said Subhash Garg, former secretary in the Finance Ministry’s Department of Economic Affairs, and the man at the helm of the government’s first report to propose actions concerning cryptocurrencies.
That report had recommended a ban and suggested creation of a digital rupee. Since his retirement, Garg’s stance has changed in favor of regulating crypto.
“It is likely to get a mention. But the government may avoid it altogether too. Why enter into a controversy unless there is clarity on how to deal with cryptocurrencies. So far the government has not made clear how it plans to deal with cryptocurrencies,” Garg said.
A mention of cryptocurrency could be painted by interested parties as legitimizing the unregulated space, according to at least two policy experts who have worked closely with the government.
Spokespersons of exchanges have been going on television channels and speaking to the media about what their wishlist is, even if the possibility of any mention is unclear.
Edul Patel, the CEO of Mudrex, a crypto asset management platform, said he expects some sort of crypto mention during the speech.
“We expect a mention that will be directional in nature not instructional. We don’t expect any reasonably large changes. Purely because the government is taking its time to figure out what’s happening, which is a great thing, avoiding knee jerk reactions,” Patel said.
Sumit Gupta, co-founder and CEO at CoinDCX, one of the largest exchanges in India, believed circumstances have changed in the last year. 2021 was a great year for the sector, and therefore a mention of cryptocurrencies is possible.
“There has been a lot of new activity, trading, investors and the government has also taken part in discussions. It is now too big to be ignored,” Gupta said .
What exchanges want
In the event that India’s finance minister does address cryptocurrencies in the budget speech, exchanges appear to have some universal demands.
Categorizing cryptocurrencies is the first. Most crypto-related companies want it to be classified as assets and not currencies. This seems likely, since the legislation’s name has replaced the word “cryptocurrency” with “cryptoasset.”
“While the legal implementation still seems a while away, any initiative announced in the budget would at least open a direct line of conversation on crypto classification as an asset class,” said Nischal Shetty, counder and CEO of WazirX, India’s largest exchange.
Mudrex’s Patel said he hoped the budget would “categorize cryptocurrency but not necessarily as an asset.”
He said he believes treating cryptocurrencies as assets would be “fundamentally wrong.”
“It doesn’t necessarily have properties of an asset, things that you can hold, that don’t act as a store of value. Most exchanges are trying to define cryptocurrencies as a security and get it under the mandate of SEBI [India’s market regulator]. Even if that has its own complications,” Patel said.
CoinDCX’s Gupta felt the “15 to 20 million unique crypto investors cannot be ignored and the market is now a very strong revenue channel for the country.”
According to Gupta, policy discussions suggest categorizing cryptocurrencies is “headed in the direction of crypto-assets.” This categorization goes hand in hand with clarity on taxation.
“For example if it is a commercial transaction then appropriate GST guidelines can be levied. If it is an investment, capital gains tax can be levied. If someone is trading crypto very actively then they can file for taxes as a business. And if at all, a foreign transaction is involved it should be reported to RBI (India’s Central Bank) under FEMA (Foreign Exchange Management Act) regulations,” he told CoinDesk.
Such granular categorization is not technologically possible and cannot be implemented, according to Gaurav Mehta, founder of Catax, a one-stop-shop for crypto taxes, blockchain auditing and forensics.
“It is impossible to keep track of use cases, it is possible to assign an INR value to crypto transactions and so satisfy tax compliance requirements,” Mehta said.
In his view, cryptocurrency purchase, sale and trade transactions could be regulated at the exchange level, with compliance requirements enforced on these trading platforms.
Recently, as many as five exchanges were “inspected” by tax agencies that visited their offices, paying taxes including, in some cases, penalties, for a total of more than 700 million rupees, CoinDesk reported.
According to Mehta, the government may not mention cryptocurrency but they are likely to reinforce the idea that any income derived from the mobilization of capital would be subjected to the capital gain tax and cryptocurrencies.
The lowest hanging fruit is a demand for giving a thumbs up to certain best practices employed by exchanges themselves as self regulation or their own code of conduct as they await government regulation.
This includes an introduction of licensing requirements such as know your customer (KYC) rules, to satisfy anti-money laundering and combating financing of terrorism (CFT) obligations, defined paths for money entry and exit points, auditing custodians, and allowing self custody.
The exchanges though think it is unlikely the government will touch upon or elaborate on its licensing position in this budget.
“We follow strict regulatory practices to ensure customer protection. We hope the budget will help standardize best practices,” said Sharan Nair, chief business officer at CoinSwitch Kuber.
An understanding of demands for best practices includes some specifics.
“Virtual asset service providers can be accountable for enhanced customer due diligence (CDD), transaction monitoring and record-keeping, as well as obligations to report suspicious transactions for higher threshold amounts, similar to traditional finance institutions,” said Shivam Thakral, CEO of BuyUcoin.
Virtual asset service providers (VASPs) could include cryptocurrency exchanges, digital wallet providers, financial institutions like banks which support crypto asset transactions and other similar entities.
Several in the crypto industry feel it is too early for the government to give a thumbs up to these best practices.
Others felt that “the seamless experience is missing” for customers.
“It is important to clearly define how people can move into crypto and out of it. A lot of banks don’t prefer to work with crypto companies. They can’t because there might be repercussions,” Mudrex’s Patel said.
CoinDCX’s Gupta proposed the idea of having cryptocurrency companies registered with a centralized body to streamline information gathering from the companies to the government before licensing but he doesn’t see it getting touched upon in this budget.
Several industry persons questioned the disproportionate attention given to taxing, trading or investing cryptocurrencies. They sought acknowledgement for the Web 3 space to help India’s blockchain industry keep pace with the world in the digital revolution. In other words, give us clarity on how the tokenization industry will work in India.
“Government should clarify what is the status of tokens that powers the emerging web 3 ecosystem,” Catax’s Mehta said.
“Crypto technology and blockchain are long-term phenomena that are not going away,” said Pratik Gauri, co-founder and CEO of 5ire, a distributed high-performance computing network based on blockchain technology.
The budget can “find ways to provide a ground swell in adoption of blockchain technology in the meat and bones of the largest democracy in the world,” Gauri said.