India’s cryptocurrency ecosystem is eagerly hoping for a hint of regulation from the government on Feb. 1.
Indian Finance Minister Nirmala Sitharaman will present the nation’s budget at the beginning of the month during what is considered to be the most important financial day of the year for the world’s largest democracy.
The speech sets the financial tone for the year, as it indicates how government resources will be allocated and how taxes will be regulated. It also addresses which welfare policies will be introduced and 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 mentioning crypto.
“Cryptocurrencies don’t give votes,” said one policy expert, who requested anonymity because the individual works closely with the national government. The individual suggested the speech would be populist in nature, geared toward 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. That includes voting in Uttar Pradesh, the most-populous 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 be passed by parliament. Therefore, it is still unlikely the crypto-sphere will see any immediate regulation implemented.
What have past budgets said
India’s finance minister has mentioned crypto and blockchain in the past on multiple occasions.
On No. 30, Sitharaman 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 didn't know how much tax had been collected on cryptocurrency transactions at the time.
Over the past several years, mentions of cryptocurrencies in the budget speech have declined.
In the past, language in the budget speech has gone from stating, “The government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system” and “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 creating 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 seen as legitimizing the unregulated sector, according to at least two policy experts who have worked closely with the government.
Representatives of crypto exchanges have been speaking to the media on TV about their wishes.
Edul Patel, 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.
Coming Off Strong Year
Sumit Gupta, co-founder and CEO at CoinDCX, one of the largest exchanges in India, said the crypto situation has changed as last year was a great one 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 .
If Sitharaman does address cryptocurrencies, exchanges appear to have some common demands.
The first is that the government classify cryptocurrencies. Most crypto-related companies want crypto to be classified as an asset, not a currency. That seems likely, because a measure has replaced the word "cryptocurrency" with the term "crypto asset."
“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, co-founder and CEO of WazirX, India’s largest crypto 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 (the Securities and Exchange Board of India, the country'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 classifying cryptocurrencies is “headed in the direction of crypto assets.” That classification goes hand in hand with clarity on taxation.
“For example if it is a commercial transaction then appropriate GST (good and service tax) 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 (the Reserve Bank of India, the central bank) under FEMA (Foreign Exchange Management Act) regulations,” Gupta told CoinDesk.
Such a granular classification 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 (Indian rupee) value to crypto transactions and so satisfy tax compliance requirements,” Mehta said.
In his view, cryptocurrency purchases, sales and trades could be regulated at the exchange level, with compliance requirements enforced on 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 over 700 million rupees, CoinDesk reported.
According to Mehta, the government may not mention cryptocurrency, but it is likely to reinforce the idea that any income derived from the mobilization of capital would be subjected to the capital gains tax.
The lowest-hanging fruit is a demand for giving a thumbs up to certain best practices employed by the crypto exchanges themselves as self-regulation or their own code of conduct as they await government regulation.
This includes licensing requirements such as having know-your-customer (KYC) rules, to satisfy anti-money laundering and combating financing of terrorism (CFT) obligations, establishing 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 crypto exchange CoinSwitch Kuber.
Understanding what best practices require includes spelling out 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) may include cryptocurrency exchanges, digital wallet providers and banks that support crypto asset transactions.
Several in the crypto industry feel it is too early for the government to give a thumbs up to these best practices.
Meanwhile, some say 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 thinks reporting requirements should be addressed before licensing, but he doesn’t see the upcoming budget touching that issue.
Several in the industry questioned the disproportionate attention given to taxing, trading or investing cryptocurrencies. They seek acknowledgement of the Web 3 sector to help India’s blockchain industry keep pace with the rest of the world. In other words, give the crypto industry clarity on how the tokenization business 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 blockchain-based computer network.
The budget can “find ways to provide a groundswell in adoption of blockchain technology in the meat and bones of the largest democracy in the world,” Gauri said.
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