A technician named Laszlo Hanyecz from Florida is credited with carrying out the world’s first transaction of commercial significance using bitcoins on May 22, 2010. He spent 10,000 bitcoins on the purchase of two pizzas. That is equivalent to $357 million based on today’s prices, making it the most expensive food order in the history of the globe. When bitcoin was at its all-time high a month ago, the worth of the two pizzas would have been equivalent to $600 million. The 22nd of May is celebrated as Bitcoin Pizza Day by people who are interested in cryptocurrencies.
Cryptocurrencies such as bitcoin are engaged in a global battle for legitimacy, despite the widespread popularity of cryptocurrencies and the increasing demand for them. On the other hand, countries despise them. In point of fact, the government of India is contemplating making the ownership, mining, dealing, transfer, and issuance of cryptocurrency assets illegal. despite the fact that this poses a risk to the Digital India initiative because it will hinder the development of blockchain, which is a database that stores data in blocks and has the potential to assist governments and businesses in maintaining accurate records in a seamless manner while also cutting down on fraud.
The central government, the Reserve Bank of India (RBI), and the judiciary in India have all given contradictory statements regarding the legality of cryptocurrencies over the course of the past eight years, but none of them have provided a definitive explanation. Those individuals who have deposited Rs 15,000 crore in 340 different cryptocurrency trading platforms have been kept on tenterhooks as a result of this. As the market waits in stony stillness, the daily trading volume ranges between nearly $400 million and $500 million (Rs 2,920 million and 3,650 crore).
What exactly are digital currencies known as?
Cryptocurrencies are decentralized peer-to-peer digital commodities. P2P stands for peer-to-peer. They operate using blockchain technology. Because of this, it is impossible to modify the system, hack it, or cheat it in any way because the ledgers of transactions are distributed across peer networks. Every participant’s record is updated with newly completed transactions as they occur. All interactions can be verified by the public using the digital ledger.
These digital coins have the potential to be used in the same ways that traditional currencies, assets, commodities, and utilities are. They can be exchanged for a variety of different products and services because they are a form of currency. For example, Bitcoin is currently being accepted for purchase of a variety of products and services. It is comparable to shares in both an asset and a protection capacity. The worth of the security tokens is derived from an underlying asset that is held by a third party and can be traded. These tokens represent rights over property, business shares, revenue streams, or underlying assets. They can also be used to purchase additional tokens. Tokens are used in some countries, and whenever a business reaches a certain financial milestone, such as $100 in profits, and there are 100 people who hold tokens, then each individual automatically receives one unit of value. Jaideep Reddy, a technology lawyer at Nishith Desai and Associates, compares it to programming dividend distribution into blockchain. “It’s like programming into a computer,” he says. Utility tokens are a type of user token or app coin that, similar to a promotional code for Amazon, can be redeemed for discounts or additional advantages. The Ether token serves as a representation of the right to utilize the Ethereum network. It’s possible for a cryptocurrency asset to belong to more than one division. It is possible to make payments with ether, in addition to using it as a utility currency.
What the Government Is Looking for
The government and the RBI have made statements that contradict one another, which has contributed to the uncertainty surrounding cryptocurrencies in India. The Governor of the Reserve Bank of India (RBI), Shaktikanta Das, stated in February 2021 that the institution has some reservations regarding cryptocurrencies and is working on developing its own digital currency. Around the same time, the Minister of Finance, Nirmala Sitharaman, stated in the Rajya Sabha that a high-level committee had been formed to study problems related to virtual currencies (VCs), and that the committee had recommended that all private cryptocurrencies be prohibited, with the exception of those that were issued by the state. The following month, she will be making the following statement: “A lot of negotiations and discussions are happening around cryptocurrency with RBI, which will take a call on what kind of unofficial cryptocurrency will have to be planned and how it is to be regulated.” We want to make sure that there is a space open for the many different types of experiments that will have to take place in the cryptocurrency world.
In the meantime, the government is putting more pressure on crypto dealers and platforms by way of increased regulation. Because of a notification issued earlier this year by the Ministry of Corporate Affairs, it is now obligatory for businesses to disclose information regarding any cryptocurrency trading or investments that took place during the previous fiscal year. The government is interested in collecting information from businesses regarding their vulnerability to cryptocurrency. The experts are concerned that this may be the beginning of an investigation into the businesses that purchase and sell digital currencies. According to Uday Ved, the head of tax at the international accounting company KNAV, “This investigation might be used to take penal action in the future.”
The Enforcement Directorate (ED) filed charges of money laundering and fund diversion against India’s biggest cryptocurrency exchange, WazirX, in June 2021. In its notification, it asserted that transactions involving cryptocurrencies to the value of Rs 2,790.74 crore violated the FEMA Rules from 1999. According to the ED, users of WazirX received cryptocurrency valued at Rs 880 crore via its pool account from Binance, the biggest cryptocurrency exchange in the world, and transferred out Rs 1,400 crore worth of cryptocurrency to Binance accounts. The Enforcement Directorate is also investigating a group of Chinese residents who are suspected of laundering 57 crore Indian rupees by first converting the money into the digital currency Tether and then transferring it to accounts held at Binance. According to the officials, none of these transactions are visible on the blockchain, making it impossible to monitor or investigate them. An official from the ED has stated that “it was found that WazirX clients could transfer ‘valuable’ cryptocurrencies to any person regardless of location and nationality without proper documentation,” which creates a safe environment for individuals who engage in activities such as money laundering or other illegal endeavors.
According to Rajesh Narain Gupta, Managing Partner at SNG & Partners, a full-service law company, WazirX could potentially run into some difficulties in India. According to him, “Indian regulators need to adopt a firm stand on cryptocurrency as the fate of investors and platform-offering services hangs in the balance,” and he says that the fate of investors and platform-offering services hangs in the balance. Since 2013, the government has been cognizant of the existence of cryptocurrencies. When there is so much at stake, sudden, severe action is not something that should be taken because nothing significant has been able to be done in the previous seven or eight years. According to Gupta, there is a requirement to adopt a perspective that is rational, well-informed, and worldwide.
Alternating between heat and cold
RBI published its first Financial Stability Report in 2013, in which it defined virtual currencies (VCs) as “unregulated digital money, issued and controlled by developers and used and accepted by members of a specific virtual community.” This was the first time that RBI had used this definition. In the latter part of that year, it issued a warning to holders, users, and traders of VCs about the potential financial, legal, and safety dangers. It was stated that the RBI was looking into whether or not such currencies were legitimate. In its report from 2017, an Inter-Disciplinary Committee recommended against engaging in transactions involving venture capital. It suggested modifying laws so that “possession, trading, and use of cryptocurrencies would be illegal and punishable.” [Cryptocurrency] In 2018, the RBI issued a directive that prohibited the use of the banking system for activities connected to cryptocurrencies. In the year 2020, this matter was dismissed by the Supreme Court.
After this, people flocked to deposit their money in cryptocurrencies like bitcoin and others. In the past year, trading amounts on cryptocurrency exchanges in India have increased by a factor of several times. WazirX saw an increase in quantities of between 700 and 800 percent. When compared to $6,500 in March of 2020, the price of Bitcoin has since increased by 790 percent. It generated returns of over 300 percent in the fiscal year 2020 and over 800 percent in the fiscal year 2021, which were the greatest across all asset classes. Due to the interest shown by investors, there are now approximately 340 start-ups operating in the cryptocurrency sector in India. A lot is at stake.
Extremely Risky Bet
It is estimated that there are around one crore investors in India possessing a total value of between Rs 10,000 and Rs 15,000 crore worth of cryptocurrencies. That is a significant sum of money for a complete prohibition. “The draft that said possessing, holding, or transferring cryptocurrencies would be punished by imprisonment or fine would bring lakhs of people under the lens and force them to liquidate their assets,” says Jaideep Reddy. “The draft that said possessing, holding, or transferring cryptocurrencies would be punished by imprisonment or fine.”
Even if the government gives investors a window of opportunity of ninety days to unload their properties, the question remains: who will they sell them to? Small investors will have a difficult time because they won’t be able to liquidate their investments, according to Harish B.V., co-founder and chief operating officer of Unocoin, a platform for exchanging cryptocurrencies.
Does this imply that those who already possess cryptocurrencies will be unable to sell or trade them? The destruction of such massive investments, which pertain to millions of people, is not something that the experts believe the government will do. According to Reddy, a prohibition could end up destroying the legal ecosystem while helping the black market thrive.
An strategy that is “Calibrated”
According to the recent statements made by the minister of finance, it would appear that the government does not intend to implement a blanket prohibition. She stated in March that the central government will provide sufficient leeway for individuals to experiment with bitcoins, blockchain, and other cryptocurrencies. She advocated for blockchain technology and made the point that India cannot fall behind in technological advancements while stating that the field of finance is one in which India has a competitive advantage. “A great number of fintech businesses have made significant advancements. There have been multiple demonstrations sent our way. At the state level, there is a lot of activity going on right now. “We want to take it up in a big way in the Gandhinagar Gift City,” she said. “We want to take it up in a big way.”
These statements give the impression that the proposed Bill will give purchasing, selling, and trading cryptocurrencies a stamp of legitimacy under the law. “At this point, this is just conjecture, and it remains to be seen what path Parliament decides to adopt,” says Gupta. “It remains to be seen what happens next.”
The Reserve Bank of India (RBI) is also working on its very own digital currency, which will be known as the Central Bank-backed Digital Currency. Das, from the RBI, emphasized that it would be distinct from cryptocurrencies. “We don’t want to fall behind in the technological revolution,” the president said. It is necessary to make use of the advantages offered by blockchain technology. Regarding cryptocurrencies, we do have some reservations,” he went on to say.
A suggestion to outlaw the use of cryptocurrencies in financial transactions was shot down by the National Payments Corporation of India in May of 2021. It requested that financial institutions conduct their own risk assessments before deciding whether or not to permit transactions involving digital currencies. The agency had been approached by a number of lenders who requested that it prohibit cryptocurrency transactions on its network. At this time, the majority of financial institutions do not provide UPI services to cryptocurrency consumers.
The Critical Pieces of Information
Due to the fact that officials have not yet consulted industry participants regarding the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, very few people are aware of its contents. “With the exception of the Ministry of Finance, no one is aware of the contents of the Bill. On the other hand, the government might establish a commission to investigate and control cryptocurrency. It is possible that the recommendations that were made by the Garg Committee in 2019 are no longer relevant. According to Nischal Shetty, Founder and CEO of WazirX, there is a need for a fresh look rather than an outright prohibition on the practice. Anyone who mines, generates, holds, sells, transfers, or issues cryptocurrency would be subject to penalties of up to Rs 25 crore ($3.63 million) and a jail sentence of up to 10 years, according to the committee’s recommendations, which were overseen by S.C. Garg, who served as finance secretary at the time.
Why Do Governments Hate Cryptocurrency?
The decentralized nature of cryptocurrency networks is the primary source of concern for national administrations. They are not supported by any nation-state in particular. This places them on the opposite end of the spectrum from central banks, which use monetary power to shape policy and control currency circulation, as stated in a report by Citi Research. This gives governments the ability to encourage investment and spending, which in turn helps to generate employment and protects the economy from inflation and recession.
Anurag Thakur, Minister of State for Finance, has in the past expressed concern regarding the price volatility of cryptocurrencies, stating that the value of these coins frequently changes by ten times within a week. He stated that such an event would never occur with paper currencies. This means that regular people cannot use it as a form of payment when purchasing products and services.
Another major concern for governments is the funding of terrorist organizations. According to a paper written by Abhinav Pandya, Founder & CEO, Usanas Foundation, and a geopolitical analyst, in 2016, an online jihadi unit initiated social media campaigns in order to collect funds through the use of bitcoins. “Earlier, in June 2015, a teen from Virginia was posting instructions on how to contribute to IS using bitcoins on the social media platform Twitter. The Wall Street Journal published an article in June 2017 claiming that an Indonesian militant based in Syria was using PayPal and bitcoins to finance the Islamic State. On November 6, 2017, the Islamic news service Dawaal Haqq solicited donations on Facebook through the use of bitcoins. In December, a few more websites sympathetic to IS began soliciting financial support in the form of bitcoin contributions. According to Pandya, despite the fact that cryptocurrency has the potential to revolutionize the global financial transaction system, it also possesses characteristics that make it appealing to cybercriminals, money launderers, drug traffickers, and terrorists.
In spite of this, Michael Morell, a former director of the CIA, claimed in his paper titled “An Analysis of Bitcoin’s Use in Illicit Finance” that the proportion of illegal cryptocurrency activity to the overall amount of cryptocurrency activity from 2017 to 2020 was less than one percent. According to estimates provided by CipherTrace, a blockchain analytics company, the percentage of illegal activity that constitutes Bitcoin’s overall transaction volume is less than 0.5 percent.
The former CIA counterterrorism specialist believes that the hype surrounding cryptocurrency is much greater than the reality, and that terrorist organizations are not yet using cryptocurrency as a significant platform. In any case, is it not the responsibility of elected officials to craft regulations that allow the benefits of an innovation to flourish while protecting consumers from the drawbacks?
The Answer or Answers
The 340 cryptocurrency start-ups in India are lobbying for legislation rather than a ban on the industry. Experts in the industry are interested in having a conversation with the administration. They argue that the government should be aware of the technological ins and outs of this technology. “At the moment, the Bill is derived from theoretical knowledge as opposed to the practical knowledge that the business possesses. We are the ones who are going to be getting our hands soiled and actually putting it together. Nilesh Shetty, who works for WazirX, says that the company needs both practical and theoretical knowledge.
In India, the majority of use cases, or 99 percent, involve exchanging cryptocurrencies as assets, according to Sharan Nair, Chief Business Officer at CoinSwitch Kuber. According to Nair, “our appeal to the government has been to not use the word ‘currency,’ but rather treat it as a commodity, like gold.” “Our appeal has been to treat it as a commodity, like gold.” He also notes that nobody is making purchases in cryptocurrency in this location.
The trade group IndiaTech.org has proposed a five-step plan for the government to follow in order to effectively regulate cryptocurrencies while simultaneously fostering creativity. It has been recommended that cryptocurrencies be handled more like assets than like currencies. In the company’s white paper, it is stated that “Crypto must be understood to refer to digital assets and not as a replacement for fiat currency.” Second, because there is currently a lack of understanding regarding taxation, the research report from IndiaTech proposes that digital assets be treated the same way as other investments and be subject to taxes on capital gains under the Income Tax Act. It suggests that self-regulation and a standard KYC should be used so that transactions can be easily traced.
Regulation in a Number of Other Nations
According to projections made by the World Economic Forum (WEF), blockchain technology will be responsible for supporting 10 percent of worldwide gross domestic product by the year 2025. China is transitioning its legal tender into the form of computer code, despite the fact that the country outlawed cryptocurrencies in 2017. As a result, the majority of China’s cryptocurrency exchanges moved to Japan, which classifies earnings from cryptocurrencies as additional income. Japan, which was one of the early adopters of bitcoin and is now one of its largest marketplaces, has legalized cryptocurrencies as a form of property. The United States of America, which is the second-largest market for bitcoin, does not recognize it as a form of legal tender but instead views it as an investment instrument. However, it does not prohibit the use of cryptocurrencies for the purchase of products and services and taxes profits as capital gains.
Bitcoins can be purchased by residents of Switzerland at any of the country’s hundreds of automatic teller machines and ticket vending machines. Although cryptocurrencies like bitcoin are not recognized as legal tender in South Korea and Germany, citizens are still able to exchange and invest in bitcoin.
Singapore’s taxation of cryptocurrencies takes into account how they are used. Businesses that make profits using cryptocurrencies in the regular operation of their operations are subject to taxation on those profits. Profits made by companies that mine cryptocurrencies and barter digital tokens for fiat currency are subject to taxation. Gains on capital investments made by companies over the long term in the form of purchases of digital assets are exempt from taxation.
The majority of nations have not made an unequivocal decision regarding the legitimacy of cryptocurrencies, opting instead to take a wait-and-see strategy. “Regulators’ supervision has been seen by some as tacit approval for the use of cryptocurrencies in legitimate transactions. However, cryptocurrencies will never be lawfully acceptable as a substitute for the legal tender of a country unless the government backs them, according to Rajesh Narain Gupta SNG & Partners. This prediction was made by the law firm.
Is it Possible to Prohibit Cryptocurrency?
It is impossible to prohibit the use of digital money as an exchange unless that money is being used to engage in illegal activity. It’s possible to classify cryptocurrencies as assets, commodities, currencies, or even securities. However, it does have worth and can be exchanged for other things. “Around the globe, there are millions of people who are interested in holding cryptocurrencies. I’m happy to give you some bitcoin, and you’re welcome to send it right back. It makes no difference whether you refer to it as currency or not; the explanations are irrelevant. According to Changpeng Zhao, CEO of Binance, a cryptocurrency functions as a medium of exchange if there is an agreement in place. Zhao explains that if you agree to be paid in bitcoins for a product or service, then it is a currency, despite the fact that you can call it by any name you want.
Nischal Shetty believes that the only way to successfully outlaw cryptocurrencies is to shut down the internet. The only challenge that needs to be addressed in terms of operations is determining whether or not something is being used as a currency. For instance, one can either purchase or sell gold; however, if one were to trade gold for a car, would that be considered payment for the car or the sale of the gold? Since engaging in exchange is not illegal in India, how can we determine when something qualifies as a currency? We make use of programs such as loyalty points and exchange incentives. It’s even possible to trade vehicles, according to Jaideep Reddy of Nishith Desai and Associates.
Blockchain and cryptocurrency are inseparable.
The government has indicated that it supports blockchain technology but does not support private cryptocurrencies. In a purely technical sense, these two items are inseparable. “A blockchain that does not include cryptocurrency will inevitably wind up being the same as any other arbitrary database that you create on a computer. According to Vijay Ayyar, Head of Asia Pacific & Global Expansion at Luno, a cryptocurrency wallet and exchange, “that is not real innovation.” [Citation needed] There is currently no technological solution that will allow public blockchain network systems to function without cryptocurrency. To illustrate his point, Reddy gives an illustration. Ether, Ethereum’s primary currency, must be used to pay for any services that are purchased on the Ethereum platform if a user wishes to create a software application on the Ethereum platform. Therefore, the use of cryptocurrency is required if you wish to make use of blockchain technology.
The Desires of the Investors
“I am hoping that the government will come to a favorable conclusion. According to Siddhesh Jamsandekar, who is 34 years old and works for a private organization in Mumbai, “it should think about those who have invested before taking a harsh view or implementing a blanket ban.” In 2014, Jamsandekar spent a total of $1,000 to acquire two cryptocurrencies each costing $500. He is concerned about the legitimacy and security of his wealth.
“The topic of cryptocurrency is being discussed everywhere. According to the creator of a cryptocurrency exchange, there is a significant amount of interest from corporations. “Some large companies, including an OTT platform, have approached us to understand the legal standing of cryptocurrencies,” the legal expert at a reputable law firm explains. “This is because they want to know how cryptocurrencies are treated by the law.”
While institutional investors in the United States are progressively purchasing cryptocurrencies, including bitcoin, Indian companies are hesitating to discuss their exposure in an open setting due to a lack of legal clarity. “The vast majority of corporations are still in the investigational stage. Once the regulations are implemented, corporate migration will take place. According to Sharan Nair, who works for CoinSwitch Kuber, businesses “are super interested in cryptocurrencies” on an informal basis.
Taxation Regarding an Overseas Asset
According to Uday Ved of KNAV, cryptocurrencies are foreign assets that must be disclosed when submitting income tax returns. This is the same requirement that applies to foreign bank accounts, foreign mutual funds, and foreign stocks. According to Ved, “I don’t think there is any cryptocurrency listed in India.” According to him, an individual faces a punishment of 10 lakhs of rupees if they fail to disclose information. There is no hard and fast guideline regarding taxation, but businesses are free to classify themselves however they see fit so long as they are not taxed more than once.
According to Ritesh Kumar S., Executive Director of IndusLaw, the treatment may depend on the frequency at which revenue is earned. “The most common strategy is to tax profits made on investments. This is predicated on the presumption that the assets in question are capital assets and are not frequently traded. However, if the transaction is being carried out in the normal course of business, then the revenue could be taxed as “profits and gains from business,” as he explains.
Is it possible that there will be a sin tax of 28%? “It is difficult to tell, but a tax on value of 28 percent will skew the market. According to Jaideep Reddy, “Indians might not be able to participate at prices that are fair.” The opinion held by the most traditionalists is that cryptocurrencies are analogous to residuary goods. “If that’s the case, then the GST rate ought to be 18 percent,” he continues.
Beyond the Boundaries of Currency or Asset
The State Bank of India was the first Indian financial institution to form a partnership with J.P. Morgan in February 2021 in order to utilize J.P. Morgan’s ‘Liink’ blockchain technology for the purpose of accelerating international financial transactions. Because of this, the amount of time required to resolve problems relating to international financial transactions will be cut down from a few days to a few hours. In spite of the widespread applications of blockchain and cryptocurrencies, there is relatively little conversation about them beyond price and financial speculation.
In a booklet published by the World Economic Forum (WEF), it is stated that “while cryptocurrencies are recognized as new monetary systems and financial networks, public blockchain networks that they secure can be used to power diverse use cases and create new applications across industries.” It highlights a list of companies, protocols, and projects that represent the diversity of use cases that can be enabled by cryptocurrencies and the networks that they power. However, the list is not comprehensive. “It is more than just a platform for speculation. That is an error in thinking. According to Reddy, actual implementations are taking place all over the world. There are thousands of employees working behind the scenes at banks to enable and approve transactions. According to Sumit Gupta, Co-founder and CEO of CoinDCX, blockchain technology makes it possible to do all of this without the participation of people.
In spite of the ongoing controversy regarding cryptocurrencies, the truth remains that India requires blockchain technology. It is possible to guarantee that it is in step with the rest of the world by adopting cryptocurrencies that have adequate checks and balances. The government needs to make a judgment regarding this matter as soon as possible.
