India's stance on cryptocurrencies is evolving as more investors join the bandwagon

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India's stance on cryptocurrencies is evolving as more investors join the bandwagon
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Investments by India’s 15 million-strong crypto trading community spiked by 612% year-over-year, skyscraping from $923 million in April 2020 to $6.6 billion by the end of May this year.

The data is a testimony to the fact that cryptocurrencies are fast becoming a favored asset class amongst the millennials and Gen Z Indians who prefer Bitcoin over the conventional metals, property and stocks, for transparency and the growth it offers.

“The growth trajectory (of crypto trading in India) is something which is very, very visible,” said Nischal Shetty, the CEO of WazirX. Out of the 70 million people who are currently into equity, 25% have already started investing in cryptocurrencies. This notable shift in investing patterns among the Indians is pushing the crypto buzz in political corridors as well.

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India's stance on cryptocurrencies is evolving as more investors join the bandwagon
It's been 1000 days since WazirX started its crypto campaign in India on 1 November 2018 WazirX

The ‘Cryptographic’ stance of the government

Until now, the Indian crypto trading space has been a laissez-faire arena propped up by market forces with minimal regulations in place. But that’s been changing as cryptocurrencies have gotten more popular with the masses.

From the Reserve Bank of India’s (RBI) blanket ban on cryptocurrency trading in 2018, followed by the Supreme Court’s reversal of the same two years later, to the talks of a proposed cryptocurrency regulation bill taking a softer stance — the government’s take on cryptocurrency has been progressively encouraging.

This regulatory unclarity had the crypto exchanges operating in India bogged down. However, soon after, RBI’s circular gave the industry some much-needed clarity. The government has been understandably concerned over the degree of anonymity that comes with cryptocurrencies. There have also been reports of possible use cases in terror financing, uncensored cross-border payments, and money laundering. To this argument, the Indian crypto community has a straightforward answer — don’t ban cryptocurrencies, but regulate the crypto space.

“India needs a dedicated department to regulate the crypto space. Not regulating them will only encourage the black market.”

Sidharth Sogani, founder and CEO of Crebaco Global

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The recent months have brought some clarity over the stance of the government regarding crypto. There are talks underway of classifying cryptocurrencies as an asset class. Once cryptocurrencies pass the classification hurdle, their legislation would be overseen by the Securities and Exchange Board of India (SEBI), however, the report hasn’t been verified yet. There are reports in the media of RBI considering introducing its own CBDC in the near future and that an expert panel has already been put together to study the same.

What are the odds of crypto regulation in India?

Over the past few months, there have been quite few positive signs from the Indian government with respect to digital assets.

The first and the most important being the Finance Minister’s statement in March 2021 at the India Today Conclave. Nirmala Sitharaman clearly stated that the government isn’t "shutting off all the options," even as the RBI retains the power to take a call on whether or not it wants to issue a centralised bank digital currency (CBDC).

Sitharaman also disclosed that the Centre will provide “adequate windows to experiment with bitcoins, blockchain, and cryptocurrency.”
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Meanwhile, the former Minister of State Finance Anurag Singh Thakur added that the government is in the process of collecting income tax on cryptocurrency earnings. The only catch is that the government currently maintains no records of the same and lacks the means to capture such information.

Reports suggest that using overseas exchanges to trade in cryptocurrency may attract a 2% equalization levy on transactions. Alternatively, these exchanges might be required to pay an additional 18% tax if they are not based in India. Recently, the Ministry of Corporate Affairs made it mandatory for companies to declare their crypto investments held during the financial year.

As we await the regulatory framework, one thing is for sure, the government’s stance on cryptos has evolved from a negative to one of a positive outlook. The government, contrary to the rumours of a trading ban, is gearing up to adopt a more lenient approach towards cryptos and is showing prominent signs of regulating the nascent industry via a calibrated approach, while keeping all the market players involved in the process.
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The suggested regulatory mechanisms

The technology lobby group, Indiatech.org, recently submitted a five-point proposal regarding cryptocurrency regulation to the Indian government. It posited that the idea of crypto as an asset class is more realistic than a legal tender.

Countries like El Salvador that do not possess any native currencies are more suitable for cryptocurrency adoption as a legal tender. For countries like India, Bitcoin being ‘akin to money’ (as posited by an ED investigation report) is an unlikely scenario.

Further, to combat the confusion over foreign funds in crypto activities in India, the government could allow only Indian crypto exchanges with an FDI cap, of say 26%, in place in line with the banking norms.

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Concerning taxation, the report recommended the provision and treatment of gains from cryptos under the ‘Profit and Gains from Business and Profession’ head or ‘Income from Capital Gains’.

With a robust know-your-customer (KYC)/ or anti-money laundering (AML) process in place, the provenance of crypto transactions via an exchange and the history of cross-border remittances via crypto can easily be attained. Certain recommendations by the Financial Action Task Force (FATF), when put in place, can help counter money laundering practices while implementing necessary safeguards against terror financing.

If the government allows only those crypto-assets such as Bitcoin that give access to forensic analysis and could be subjected to certain law enforcement, most of the money laundering practices could be minimised.

The future of cryptocurrencies in India - the community perspective

As of now, we can say that the Indian government isn’t in a state of crypto denial but at a stage where it is processing the nuances of accepting a digitized token, backed by a revolutionary technology.
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Surely, the government needs time mulling over an ‘asset class’, the inclusion of which would decide the future of other asset classes in the portfolio of the citizens, and ultimately, the financial economy as a whole.

The world has already taken some progressive steps to regulate crypto, with countries like Japan having taken the lead in recognizing them years ago. The EU Commission too has introduced a directive on 'Markets in Crypto-assets' to regulate trading in crypto-assets and support digital finance in all EU states. All EU states have to follow the AML Directive 5 which has strict rules to combat money laundering.

As a vigilant community of crypto enthusiasts, WazirX is intent upon building the necessary infrastructure to pioneer the next crypto boom as and when it arrives. Many organizations including WazirX, have taken the case upon themselves to structure a self-imposed code of conduct pursuant to a reasonable template of regulations that “replicates what exists in the traditional financial world”.
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Disclaimer: This is a sponsored post in partnership with WazirX.

For a more in-depth discussion, come on over to Business Insider Cryptosphere — a forum where users can deep dive into all things crypto, engage in interesting discussions and stay ahead of the curve.

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