There is currently a lot of noise around whether the Indian government will ban cryptocurrencies or not. While details are not known, the 2021 bill regulating their use is to be tabled in Parliament’s Winter Session.
Before anything else, it is important to know that there is a difference in the naming of the 2019 and 2021 bills.
In 2019, the bill’s name suggested a blanket ban. The ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’ read that no one should mine, generate, hold, sell, deal in, issue, transfer, dispose of or use cryptocurrency.
Fast forward to 2021, a number of things have changed. The bill is now named ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’, and was first listed for the Budget session but was deferred for wider consultations. Since then, the industry has seen substantial growth with greater participation, and the government consulted crypto associations, exchanges and other experts to decide on the way forward, fueling optimism among stakeholders.
What to expect from the 2021 Bill?
Over the past few months, government sources have revealed that the government will look to regulate cryptocurrencies, treat them as an asset and not a currency, and consider taxing the returns on these investments.
One thing has been certain that cryptos will not be allowed as currency in the country.
Rashmi Deshpande, partner in the Indirect Tax Practice Group at Khaitan & Co, says, “The 2019 Bill will have to be overhauled because that bill lacked an understanding of the highly complex cryptocurrency business. Plus, in today’s scenario where everybody is investing in cryptocurrencies and there are a lot of businesses around it, it cannot be banned.”
According to a news report by CNN News18, which quoted government sources, there will be no blanket ban but a regulatory mechanism will be put in place.
So, what in the crypto-verse will be regulated?
Deshpande breaks it down. Firstly, crypto trading will be allowed only through platforms and exchanges officially recognised by the government. There may even be a new regulatory body or cryptocurrencies may be brought under the ambit of the Reserve Bank of India (RBI).
Secondly, since crypto involves cross-border transactions, a Securities and Exchange Board of India (SEBI)-like body will be required to monitor trades.
“Investor protection is the most important. Checks and balances will be required to avoid instances of fraud, and norms on penalties will have to be formed in cases of frauds against investors,” she adds.
Technology lawyer Jaideep Reddy of Nishith Desai Associates says, “We have recommended in the past that existing laws such as the Consumer Protection Act, FEMA, IPC, Information Technology Act, PSS Act, PMLA, Prize Chits Act, deposits-related laws, securities laws and tax laws should be actively enforced with regard to crypto-asset business activity.”
What will be the tax?
The industry is wary about taxation. A high rate could dampen the sentiment and slow down the rush that Indian crypto exchanges have been witnessing over the past two years.
For taxation, cryptocurrencies may have to be segregated according to their function. A paper by Nishith Desai Associates has suggested three buckets– payment tokens, security tokens and utility tokens.
“Clarity is needed on whether returns can be considered as capital assets under income tax. For GST, the approach is a little more complex. We need to know if it will be treated as goods or services, and also on what tax slab it can come under,” Deshpande says.
Confusing use of words
The circular on the bill says that it looks to build a “facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India”. More importantly, it says that the bill “seeks to prohibit all private cryptocurrencies in India”.
Private cryptocurrencies are understood in India as any cryptocurrency that is not regulated or issued by the Government itself, such as Bitcoin, Ethereum and DogeCoin. But there is no clarity on the official definition of private cryptocurrencies.
“There is unnecessary confusion caused by the usage of the phrase ‘private cryptocurrency’. The government uses their typical ‘public sector’ and ‘private sector’ lens, so any instrument issued by a private, non-sovereign entity is deemed as a private crypto,” says Nitin Sharma, partner at venture capital firm Antler.
“This confuses the developers and investors in crypto because in that world, blockchains are meant to be open, public ledgers and there is no such thing as a private crypto,” he adds.
Multiple news reports since morning, quoting government sources, have assured the public that there will be no blanket ban. Then, why leave using words like prohibit? Many believe this is just an outcome of the bill description being copy-pasted from previous listings.
Stakeholders urge investors to keep calm
With two crore Indians invested in cryptocurrencies with their holdings totalling to $4-5 billion according to industry estimates, many are worried about the future.
“They need to remain calm,” says Kashif Raza, founder of crypto-education platform Bitinning. Since the chaos has erupted, Raza has been reminding people about the pointlessness of panicking when there is so little clarity.
Ashish Singhal, founder & CEO of unicorn crypto exchange CoinSwitch and co-Chair of the Blockchain and Crypto Assets Council (BACC), too shares the same view.
“I urge all crypto asset investors in the country to remain calm, do their own research before arriving at a conclusion. Investors should wait for a government statement on this matter and not rely on secondary sources of information,” adds Singhal.
Policy advisor Tanvi Ratna, who is the founder of Policy 4.0, had tweeted that the Parliament session is expected to pass a legislation.
However, according to Ratna, only a partial legislation will be passed, and operational and implementation questions might be debated only in the next Budget session.