The government has been consistently backing up policies that align with the evolving technological landscape. The Cryptocurrency Bill and the Budget announcements are efforts by the legislature to dispel its stance on the actively growing cryptocurrency market. Before delving into the specific nuances, it is imperative to understand the various components that form the building blocks of the technology on which cryptocurrency operates.
Why Blockchain gains spotlight
Blockchain gains the spotlight as it is a technology capable of digitally assessing the trail of a document at the click of a button. The entire network of cryptocurrency and the recently popularized NFTs (Non-Fungible Tokens) is run on the blockchain.
The definition of cryptocurrency under the Bill has garnered a fair amount of criticism on account of being too wide in its interpretation of what constitutes cryptocurrency. This warrants an insight into the various kinds of cryptocurrency including but not limited to public, private, permissioned, consortium, etc.
Legality of cryptocurrencies
Another reason why it is difficult to adjudge the legality of cryptocurrencies objectively is because of the key layers and participants involved in the cryptocurrency market. An examination of the role of each player in the cryptocurrency market ultimately helps assess whether a certain transaction is a part of fees or funds.
Coin investors, inventors, miners, nodes, exchanges, traders, hash power rental companies, utility companies, casual consumers, wallet providers, coin offerors, etc are all major players in the game. The proposed regulations and policies with respect to cryptocurrencies pose a direct threat to most of the participants in doing business in India.
NFTs gain in digital market
NFTs or non-fungible tokens have gained an undeniable stronghold in the digital market. They provide a sort of ownership over something along with some exclusive rights to that entity. The said entity that is offered could be anything from a beach house in Miami to possibly even historical monuments like the Taj Mahal, which one could own and access in part through these NFTs. The value of the token enhances and declines as per the value of the entity with the passage of time.
Need for regulation
The ever-changing nature of such transactions and the underlying asset value pose the fundamental question of implementing a blanket ban on cryptocurrencies. The pragmatic alternative could be regulation which proves to be mutually beneficial for all parties involved in cryptocurrency transactions including the government. Regulating cryptocurrency will fortify the aim of the government to ensure that the Indian investor and consumer do not suffer in the bloodbath that awaits when there is a loss in its intrinsic value.
Govt proposals to make crypto legal tender
The proposed Cryptocurrency Bill and the Budget announcements have given much food for thought especially where the potential taxation of cryptocurrency is concerned. Several issues connected with the dealing of cryptocurrency are yet to be demystified. One such area is the GST valuation for exchanges, i.e. the entire sale value or the trading margin.
Budget 2022 announces introduction of Digital Rupee or Central Bank Digital Currency (CBDC). The proposals effectively make cryptocurrency legal tender when issued by the Government while prohibiting the use of private virtual coins. The provisions which were keenly noted by the investors includes imposition of tax at 30 percent on trading margin and TDS at 1 percent on proceeds from transactions of virtual assets. While the high tax rate may not bother the class who are already in that tax bracket, the tax on gifting virtual assets and no deduction of lost assets will certainly give some sleepless nights. The offset of capital gains will also remain a subject matter of discussion in the days ahead.
The intention of the Government is to not only safeguard interests of investors but also improve tax buoyancy from these transactions. It is undeniable that these technologies make us very vulnerable to challenges in the form of cyberattacks, moneylaundering, terror-based funding, etc. Any legislation on this subject is bound to prove inadequate unless a holistic in-depth examination of every aspect of related technologies is carried out.
The latest taxation announcement in Budget 2022 is another indication of pragmatically addressing this complex issue without compromising on the technological advancement. Inclusion of cryptocurrency under the highest tax band can be visualised as a green signal to trade in absence of regulations and seems to forebode a slow but sure road towards legitimacy of these transactions.
(The writer is Partner. Khaitan & Co. Kanika Sharma, Associate, Khaitan & Co. also contributed to the article. Views are personal)
