Cryptocurrency Regulation in India: Is a Total Ban on Cards?

Posted by Written by Naina Bhardwaj Reading Time: 4 minutes

The Indian government is working on introducing a cryptocurrency regulation as key stakeholders want clarity from the government on issues of definition, tax treatment, and regulation. While the introduction of the regulation is awaited, we discuss what we know about the upcoming regulation’s objectives. We also report the latest developments pertaining to regulation of cryptocurrency in India.

Government to introduce a bill to ban private cryptocurrency in India

On November 23, 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 to be introduced.

The bill titled “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. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”

This announcement has since sent shockwaves in the digital currency market, with investor panic causing all major cryptocurrencies to witness a steep fall of around 15 percent and more, with Bitcoin down by around 18.53 percent, Ethereum by 15.58 per cent, and Tether by 18.29 per cent.

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.

Other recent developments giving insight into government stance

November 18, 2021

PM Modi spoke about the need for international solidarity and order to regulate cryptocurrency while representing India at the Sydney Dialogue held on November 18, 2021. The PM said: “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”.

The Sydney Dialogue is an annual summit of cyber and critical technologies to discuss the fallout of the digital domain on the law and order situation in the world.

November 13, 2021

On November 13, 2021, India hosted a comprehensive high level meeting chaired by the Indian PM 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 seen unprecedented growth in the past year. Intense deliberations were made on the impact of such an unregulated market in India with the RBI governor Shaktikanta Das flagging it as a major threat to India’s economic and financial stability and demanding a complete ban.

However, the government displayed a more optimistic approach towards regulation of cryptocurrency in India, with PM 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 and that it needs to be contained with suitable legislation.

Previous speculations about the expected cryptocurrency bill 

September 3, 2021

It has been reported by The Economic Times that India’s federal government is working on introducing a cryptocurrency bill. The Finance Minister Nirmala Sitharaman has said that she is awaiting an approval from the Cabinet on the cryptocurrency bill. It 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.

The much-anticipated legislative development is timely. At present, there is no uniform definition for crypto assets in India, creating risks for users, investors, and authorities. The lack of uniform definition has posed regulatory challenges for taxation, financial security, monitoring, etc., and these have been repeatedly flagged by the Reserve Bank of India (RBI). Moreover, investment in cryptocurrencies grew from nearly US$923 million to US$6.6 billion in India, in the period from April 2020 to May 2021.

Overall, the cryptocurrency bill’s expected objectives (as cited by 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 thus 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, Tether, etc. will be treated as assets or commodities for all purposes, including taxation and other utilities like payments, investment, etc.

It is pertinent to note that only government-approved cryptocurrencies will be allowed to be traded in India once the bill comes into effect.

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 are stakeholders 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.

At present, India is trading more than 5000 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.

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.

This article was originally published on September 3, 2021. It was last updated November 24, 2021.

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