Editorial: Regulate crypto first

The NDA government’s decision to tax crypto assets without first creating a regulatory framework for their transactions is baffling. Finance Minister Nirmala Sitharaman’s announcement, in her Budget presentation, that any income from transfer of any virtual digital asset would be taxed at the rate of 30% reflects the Centre’s eagerness to dip into the digital […]

The NDA government’s decision to tax crypto assets without first creating a regulatory framework for their transactions is baffling. Finance Minister Nirmala Sitharaman’s announcement, in her Budget presentation, that any income from transfer of any virtual digital asset would be taxed at the rate of 30% reflects the Centre’s eagerness to dip into the digital goldmine. While the need to generate new sources of revenues is understandable, the absence of a regulatory mechanism in an emerging and a highly risky asset category can hurt investors. The rules should be framed before revenue generation can become a reality. The governments and regulators across the world remain divided on how to categorise crypto and control it from an operational point of view. In the United States, while the federal government does not recognise cryptocurrencies as legal tender, various States recognise the decentralised nature of virtual currencies and have different definitions and regulations for cryptocurrencies. While a 30% tax on cryptocurrency, announced in the Budget, may have disappointed a section of investors, at least it is clear that the government has given up the idea of banning cryptocurrency altogether. Faced with two options of either banning the crypto or tax the income earned by investors, the Centre has opted for the second one. It is estimated that in 2021, more than 20 million people in India latched onto cryptocurrency. At present, Indians hold crypto assets worth $5.3 billion.

Despite being the world’s fastest growing market for cryptocurrency trading, India has been having a hot-and-cold relationship with virtual coins. The Reserve Bank of India had effectively banned crypto transactions in 2018, but the Supreme Court struck down the restriction. Now, the central bank is introducing the digital rupee to give a boost to the digital economy. In comparison with existing forms of money, the Central Bank Digital Currency (CBDC) can offer benefits to users in terms of liquidity, scalability, acceptance, ease of transactions with anonymity and faster settlement. Digital currency will also lead to a more efficient and cheaper currency management system. While opinions may be divided on legitimising the cryptocurrency, a blanket ban could be counter-productive, given the global trends in the growth of the virtual currency market. Another reason is that large investments have already been made in such instruments. The Centre needs to work towards arriving at a consensus on the mechanism of regulation of these virtual assets. In its current avatar, crypto carries security and market risks in the absence of any mechanism for inheritance, government regulation and financial stability. In transactions involving cryptocurrency, there are apprehensions that tainted funds could be mixed with the other funds, making it much more difficult to get to the source and then shut the account down. Therefore, there should be a global consultative approach to cryptos with country-specific regulations.

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