Cryptocurrency in India: Regulations and the lack thereof
India should take a holistic view of the market that balances the pros and cons of the technology to ensure the benefits outweigh the costs.
Cryptocurrency trading in India is going through something of a boom. According to CNN, young investors around the country prefer crypto as an investment over more traditional instruments such as stocks and gold.
The Reserve Bank of India had initially barred banks from dealing in cryptocurrencies, but the Supreme Court overturned the ban in March 2020. The Indian government had also indicated it might ban cryptocurrency trading, but it has not done so yet. It hasn’t produced any significant regulation to manage the sector either.
What the government has done is announce in the Union Budget presented on February 1, 2022, that income from cryptocurrencies and other digital assets would be taxed at 30%. In addition to this, losses from trading cannot be set off against other sources of income. Taken together, they could have a dampening effect on trading and investing, though given the current appetite for cryptocurrency, and the expectation that its value will continue to rise, that is debatable.
India is expected to present a Cryptocurrency Bill to the parliament at some point later this year or next year, so it’s worth looking at the approaches other countries have taken to see if there are any viewpoints India can adopt as well.
Singapore and Thailand
Looking around the geographical neighbourhood, Singapore is one country that has taken “a balanced approach” to cryptocurrency. It is legal to mine, own and trade cryptocurrencies, but the sector is tightly regulated, as is the norm in Singapore. Any profits coming from trading or mining is also taxed at 17%. Cryptocurrencies are also classified as an asset, not a currency.
Then there is Thailand, the second-largest economy in Southeast Asia. According to the Bangkok Post, which cites the Digital 2022 Global Overview Report, “20.1% of Thailand's internet users aged 16-64 own some form of cryptocurrency - the highest proportion worldwide.”
In fact, Thailand has about 10 times the number of active cryptocurrency trading accounts as the United States. “According to data from the country’s Securities and Exchange Commission, transaction volume increased by about 600% from November 2020 to April 2021.”
The popularity of cryptocurrency forced the Thai government to scrap its plan to tax gains at 15%. Instead, it plans to levy a 7% VAT. However, even this tax will be waived for trades conducted on regulated exchanges. Traders can also balance annual losses on crypto against profits from trading. The new tax breaks will be implemented from April 2022 until December 2023.
China and the United States
Then you have the world’s two biggest economies – China and the United States. They are also the only two countries with larger start-up ecosystems than India.
China has taken the nuclear approach. In September 2021, the country declared that all cryptocurrency transactions were illegal. The Chinese government views cryptocurrency as a speculative investment and a potential route for money laundering since transactions cannot be traced. "Virtual currency-related business activities are illegal financial activities," the People's Bank of China said, warning it "seriously endangers the safety of people's assets".
On the other hand, the United States has taken a hands-off approach so far. The market has even been compared to the “Wild West”, where anything goes. On March 9, US President Joe Biden took his first significant step towards regulating the market, when he signed an executive order on the government oversight of cryptocurrency.
The executive order instructs “the treasury department and other federal agencies to study the impact of cryptocurrency on financial stability and national security”. It also requires the Federal Reserve to examine the feasibility of creating its own digital currency.
It’s clear that other countries have taken a wide-ranging approach to cryptocurrency markets. Even though India has flirted with the idea of banning cryptocurrencies, at this point the government is unlikely to follow in China’s footsteps.
It’s also clear that regulation is needed and would be welcomed by market participants because it would provide a degree of certainty. India should take a holistic view of the market that balances the pros and cons of the technology to ensure the benefits outweigh the costs.