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This article is written by Mr. Siddharth Addy & Mr. Aditya Chakraborty penultimate year Law students at Amity Law School, Kolkata
The concept of Crypto Currency was developed by one Mr. Satoshi Nakamoto, famously known for his creation of Bitcoin which is today estimated at 600 billion U.S. dollars. In October 2008, he in his nine-page writeup explained the entire concept of blockchain ecosystem and emphasized on peer to peer (“P2P”) transactions with a key objective of decentralization of money, ensuring efficient network of exchange, higher efficiency and enhanced security of transactions and accessibility.
However, problem with Cryptocurrencies, NFTs and Digital Assets (“said instruments”) are that the market for them is subject to hedge inflation, high volatility, unpredictability and they are always under the radar of the government for Ponzi schemes, frauds, trading in dark web which includes but not limited to money laundering, breach of market integrity, cybersecurity, consumer protection. Further in absence of any express law it remains juxtaposed as to whether the definition of the said instruments falls under the definition of securities under The Securities Contract (Regulations) Act, 1956 (“SCRA”), or whether their definition falls under the category of commodities under Foreign Exchange Management Act, 1999 (“FEMA”).
The concern which remains is the attitude of the government towards the said instruments. The government on 1st February 2022 stated in the Union Budget that it would introduce its own digital currency through Central Banking Digital Currency system (“CBDC”) in the year 2022-23 and this currency would be issued by the Reserve Bank of India (“RBI”) which would act as a legal tender in digital form. The question remains what will be the fate of the private cryptocurrencies. Over the next part the authors shall decipher the present standpoint, the concerns pertaining to regulatory risks, Environment Social Governance (“EGS”) Concerns, taxing regime and cross border transactions. Over the end of the article, the authors shall also highlight possible outcomes to overcome this Confusion and regulate the said instruments to ensure greater investments in the Indian economy.
1. The Indian Prospective: Current Standpoint
The current standpoint of the virtual currencies and assets are similar to the Observations made in the case of Internet and Mobile Association of India Vs. Reserve Bank of India. It was observed that the problem with bitcoins is neither fish nor fowl which meant that pricing it as a commodity when no commodity exists and trying to make it behave as a currency, seems problematic. The concern is not that it is not issued by government, or it is unregulated, but the problem is that it is hard to see what it is.
Based on an application under Right to Information Act, 2005 (“RTI”) bearing no. RBIND/R/E/21/07258 dated 5th October, 2021, seeking information as to ‘How the RBI is planning to regulate virtual currencies in Indian market’, it was revealed to the authors that the RBI as per its public notices of 24th December, 2013, 1st February 2017 and 5th December, 2017 had reportedly cautioned the users, miners, traders and holders of Virtual Currencies (“VCs”) including Bitcoins, regarding risks associated in dealing with such virtual currencies. It was further adduced that RBI vide Circular dated 6th April, 2018 introduced a blanket ban on the use of VCs, However the Hon’ble Supreme Court struck down the Circular dated 6th April, 2018 in the matter of Internet & Mobile Association of India Vs. Reserve Bank of India (Supra).
The draft bill namely Banning of Cryptocurrencies & Regulation of official Digital Currency Bill, 2019 has suggested that mining, holding, selling, trading, issuing, transferring or use of Cryptocurrency is a punishable offence with a fine or imprisonment up to 10 years or both (as stated Chapter 5 & 6 of the Bill).
In recent times, we have seen some welcoming moves by the Indian Government towards regulating the cryptocurrencies. The Ministry of Corporate Affairs has made a compulsory compliance to be followed by the companies to disclose the gains and losses arising out of cryptocurrencies. Accordingly, changes have been made in schedule III of the Companies Act, 2013 from 1st April 2021. RBI vide circular dated 31st May 2021 bearing no. RBI/2021 -22/45 informed customers that the circular dated 6th April 2018 has been struck down and that banks shall not take quotations from that circular thereof. It also informed the banks to continue to carry out due diligence of their customers in line with regulations governing Know Your Customer (KYC), Anti Money Laundering, Combating Financial Terrorism, and other obligations entitled under the Prevention of Money Laundering Act, 2002. Further, the government on 1st February, 2022 stated in the Union Budget that it would introduce its own digital currency through CBDC in the year 2022 -23 and that this currency would be issued by the RBI which would act as a legal tender in digital form.
2. Environment Social Governance Compliance: -
The key concerns pertaining to ESG Compliance relating to cryptocurrency exposure is due to generation of electric waste (or e – waste). To elaborate the same, it may be stated that different coins have different impact on the ecosystem for example Bitcoin may have higher impact on environment as compared to other coins.
The potential solution to this is to adopt a ‘proof of stake’ model which has significantly lower energy consumption that the ‘proof of work’ model. Alternately, reliance on the use renewable resources to generate/mine cryptocurrencies will address a major problem. For example, the Ethereum Model of generating coins may be adopted. Therefore, identifying the place of mining and what source of energy is used can tremendously help to reduce the consumption of energy and reduce the generation of e – waste.
In view of the above, the argument that cryptocurrencies and mining thereof is a fuel hungry ecosystem and perhaps would fail to comply with the standards of sustainable development, might get reasonably challenged if the future of cryptocurrencies is based on ‘proof of stake’ platform.
3. Cross Border Transactions
When Indian residents use cryptocurrency to pay for services given and commodities sold by a non-resident outside of India, the transaction is likely to be regarded as an export of goods under the Foreign Exchange Management (Export of Goods and Services) Regulations 2015, and the Master Directions on Export of Goods and Services.
Cryptocurrency can be classified as goods and therefore if an Indian resident, transacts with someone outside India, it will be regarded as export and import. Consequently, to such transactions the provisions of FEMA will apply. Furthermore, as per FEMA, transactions with entities outside India are classified as capital and current account transactions.
More clarity will emerge when the government shall issue its own digital currency through CBDC.
In the 2022 Union Budget it was held by the government that Crypto Currencies and Digital Assets will be taxed under the head of i) Capital Gains; or ii) Business Income; based on the intentions of the investors. Income from digital assets can be taxed at 30% whereas TDS of 1% will be levied on purchase of such instruments above threshold limit.
Considering cryptocurrency as currency, the tax rate is oddly high, however, it is still a welcome step because it clarifies the Indian government's stance on cryptocurrency, which had been murky in previous months. This indicates that the government recognizes it, and perhaps the crypto bill will address the ecosystem's legality as well. The move has definite cleared some air and provided a better view of the government’s take on digital assets. There is no doubt that the high tax rate would deter most users to peruse digitals assets as a means to make money in a short span. It can be argued that the government has intelligently separated the currency use of digital currency to asset class use of it. In turn, the government has definitely legitimized digital assets as assets.
However, it is to be noted that the Crypto Tax is in its nascent days and the stakeholders shall further need clarity on i) Valuation of cryptocurrencies, ii) Taxation of miners, iii) Interface of equalization levy, iv) Implementation of withholding tax provisions in barter transactions.
Recent events have made it amply clear that the future of digital assets will be booming in the Indian market. However, with more investment, there would be a need for a dedicated legislation to govern it.
Since RBI might issue two types of digital rupee i.e., wholesale and retail and also possibly deploy smart contracts (these are blockchain-based programs that make choices automatically when certain preset conditions are met), the future of digital currency and digital assets is surely consolidated in the Indian market. In the instance where the digital Rupee is dealt on a UPI-like system, the requirement for settlements interbank will be eliminated. This would essentially mean an Indian can transact with any foreign national with a digital currency on a real time basis without any intermediary.
Moreover, with the concept of metaverse, a digital universe, getting more ground and popularity, it is only a matter of time when we buy digital property in the digital world using digital money.
Therefore, the possibilities of the future of the standardized government led cryptocurrency is vast. At the same time, private cryptocurrencies with other digital assets might just be rendered as an asset, likely to see huge investments from not just the tier one cities.
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.