After the Budget’s ‘crypto signal’, India awaits reforms
- In the Union Budget speech, Finance Minister announced a 30% flat tax rate levied on any gains made from the transfer of virtual assets including cryptocurrencies and Non-Fungible Tokens (NFTs).
- This announcement by the Finance Minister now leads to the assumption that crypto is legal in India.
- It consists of a digital denomination designed to work as a medium of exchange through a distributed computer network (a blockchain) that is not reliant on any central authority such as a government or a bank for its upholding and maintenance.
Sign of optimism
- It is high time that crypto made a splash in the country, but this splash must be carefully managed to prevent rushed creative destruction and systemic liabilities.
- Additionally, while the high tax rate would inevitably hamper the willingness of investors to convert cryptocurrencies into the national fiat, this may, in turn, open up more doors for technologically savvy and innovation-minded investors.
- The extremely high tax rate and the fact that the losses cannot be offset would invariably propel investors to turn to alternative means of storing and undertaking transactions in cryptocurrencies, without foregoing the significant losses involved as they “switch” back into the rupee.
Will aid innovation
- Such transformations would involve DeFi (Decentralised Finance) activities such as staking, lending, and providing liquidity, among others. DeFi (or “decentralized finance”) is “an umbrella term for financial services on public blockchains.
- As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, and not routed through a centralised system), pseudonymous, and open to all”.
- The adoption of crypto currencies and virtual assets would enable quicker and cheaper transactions
- It will also create new forms of wealth without centralised intermediaries — which are subject to accidental or intentional capture by vested interests.
- Difficulty faced by SMEs to access the ecosystem given the substantial barriers posed by the tax rates.
- Unless radical reforms are undertaken to liberalise the system — through positive incentives and infrastructural installation — it is unlikely that the community we speak of here is likely to reap the gains from the system.
- Participation would remain unlikely for at least a few more years to come.
- Fundamental lack of clarity in aspects of cryptocurrency usage other than taxation.
- The consolation offered by the Government in the form of the Reserve Bank of India’s CBDC will definitely help in pushing for the adoption of digital currencies, but, equally, defeats the fundamental purpose of cryptocurrency, which is decentralisation.
- Reducing tax rates in the future can be a huge reform, but considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency have to be taken care of.
- Taxing crypto altogether will not work alone, but introducing more rigorous regulations where required to prevent crypto from becoming a source of illegitimate political funding or black money.
- Incorporation of insights from seasoned partners from international communities: engaging these individuals for their insights and advice on the best practices associated with cryptocurrency policymaking.
- Systemic reforms are by no means easy, but they are critical as an amplifier of the successes that India has already accrued in the field, and as an accelerator of India’s advancement in the sphere of cryptofinance and blockchain social policymaking.