India sceptical on cryptocurrencies, but open to global cooperation

As India takes the lead at the G20, the nation grapples with regulating cryptocurrencies amid global momentum for digital currencies.

India has managed to quell the cryptocurrency frenzy within its borders by imposing substantial taxes. The issue of cryptocurrencies, however, remains on top of the government’s governance agenda, as finance minister Nirmala Sitharaman recently rekindled the debate ahead of the 18th G20 Summit.

On Tuesday, Sitharaman not only associated crypto assets with drug trade and global tax evasion, but also emphasised how digital currencies pose a threat to the global financial ecosystem. She called for global cooperation to regulate this emerging entity and promote a thriving financial ecosystem.

India, holding the presidency of the G20, has presented concerns related to the regulation of crypto assets and is actively working towards establishing a framework to address these issues. The government acknowledges that while cryptocurrencies can pose a threat when unregulated, they also present significant opportunities. Notably, global organisations such as the International Monetary Fund, the Financial Stability Board, and the OECD are already engaged in discussions and producing comprehensive papers on cryptocurrencies.

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Global efforts towards cryptocurrency regulation 

Both international regulatory bodies and individual countries have been diligently working to regulate cryptocurrencies. Some countries such as Japan and Switzerland have enacted or revised legislation governing crypto assets and their service providers, while others like the European Union, the United Arab Emirates, and the United Kingdom are in the process of drafting such regulations. In 10 G20 countries, which collectively represent over 50% of the world’s GDP, cryptocurrencies are fully legal, and regulation is under consideration in all G20 nations.

Global entities like the Financial Action Task Force (FATF) have moved swiftly to establish a global framework for all virtual asset service providers, while the International Organisation of Securities Commissions (IOSCO) has issued regulatory guidelines for crypto exchanges. Furthermore, last year, the IMF published a fintech report that proposed five recommendations for enhancing the safety of cryptocurrencies.

More recently, the G20‘s Financial Stability Board (FSB), responsible for monitoring and making recommendations on the global financial system, finalised a global regulatory framework for crypto assets. This development means that cryptocurrency firms now face a global regulatory landscape, compelling them to implement essential safeguards to prevent incidents like those witnessed at the FTX exchange and other crypto-related casualties.

India’s stance on cryptocurrencies

India has remained sceptical about digital currencies, with New Delhi repeatedly stating that cryptocurrencies should be banned due to concerns that transactions involving them resemble gambling. Reserve Bank of India (RBI) Governor Shaktikanta Das has also expressed a similar viewpoint, warning on multiple occasions that private cryptocurrencies could potentially trigger the next financial crisis.

In previous attempts to regulate cryptocurrencies, India imposed a ban on crypto assets in 2018, which was subsequently overturned by the Supreme Court in 2020. Later, the country introduced a tax on crypto transactions to disincentivise trading, with gains from such transactions being subject to a flat tax rate of 30%. Additionally, a 1% Tax Deducted at Source (TDS) is applied when transaction values exceed Rs 10,000. These rules were implemented during the 2022 Union Budget.

One of the primary challenges in regulating cryptocurrencies is their inherently borderless nature, necessitating the development of standardised regulations across all countries. Single-country regulations have proven largely ineffective, prompting governments to seek a common global approach to managing this emerging asset class. Currently, fraud related to cryptocurrencies is addressed under existing laws against fraud and cybercrime, with tax department agencies handling money laundering cases.

India is now eager to enhance its laws and technology for cross-border payments and transactions, particularly given the substantial remittances it receives. In 2022, India received $100 billion in remittances, motivating the country to pursue more efficient cross-border payment mechanisms. With an annual volume of cross-border payments reaching $20 trillion and associated costs amounting to $120 billion, India is actively advocating for interoperability of Digital Public Infrastructure as a priority within the G20. While New Delhi believes that information sharing and facilitating the seamless flow of funds are the way forward, developed nations have yet to reach a consensus on this matter.

Enhanced cooperation on cryptocurrency regulation may prove valuable, especially as the crypto market experiences a resurgence after a turbulent period in 2022, marked by the collapse of three major banks in the United States. For instance, Bitcoin prices surged to a year-to-date high of 58% by August 21, recovering from a low of $31,471 on July 13. Moreover, due to the lack of clarity surrounding crypto assets, savvy investors have exploited loopholes to evade taxes by migrating to offshore decentralised exchanges (DEXs).

DEXs operate as direct customer-to-customer platforms without intermediaries. Due to ineffective tax enforcement, individuals have increasingly gravitated toward DEXs, bypassing centralised exchanges and evading government-imposed taxes.

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Anil Nair is Founder and Editor, Policy Circle.