The Union government is working on a framework to regulate cryptocurrencies as it waits for global consensus to emerge before finalising its policies. India looks to move in line with the Organisation for Economic Co-operation and Development (OECD) which has been working on a cross-border reporting framework for crypto assets. Once in place, the framework will govern the activities of all players in the space who face issues inherent to crypto trading.
The government has been at loggerheads with investors as crypto trading is disincentivised in the country through multiple roadblocks and a hefty tax. The Union Budget for 2022-23 levied a tax on all crypto trades despite the fact that the country hasn’t legalised cryptocurrencies. The government did not frame further regulations as Reserve Bank of India has strong apprehensions about cryptocurrencies. The apex bank had proposed a ban that was subsequently stopped by a court order. It had cited destabilising effects of cryptocurrencies for the country’s monetary and fiscal health for the same.
In July this year, Finance Minister Nirmala Sitharaman had called for international collaboration to regulate cryptocurrencies. She said countries across the world need to come up with a comprehensive plan as the digital currencies are borderless in nature. Collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards would be needed for effective regulation of crypto assets, she told the Lok Sabha while answering a question.
Her remarks came on the heels of the Financial Stability Board’s statement that it would propose robust global rules for cryptocurrencies in October. The Financial Stability Board is an international body which monitors and makes recommendations on the global financial system. The participants include officials from the Group 20 countries including India.
The OECD framework on cryptocurrencies regulation
The OECD on Monday released a new global tax transparency framework called Crypto-Asset Reporting Framework (CARF). This will encourage reporting and exchange of information with respect to crypto-assets among world nations. The framework is the result of an earlier proposal of G20 that the OECD develop a framework for exchange of information between countries on crypto-assets. The CARF is to be presented to G20 finance ministers and central bank governors during their next meeting slated for October 12-13 in Washington DC.
The CARF is aimed at targeting any digital representation of value that relies on a cryptographically secure distributed ledger or a similar technology to secure transactions and validate them. Carve-outs are foreseen for assets that cannot be used for payment or investment purposes and for assets already fully covered by the common reporting standard. Moreover, the frame work obligates entities or individuals which provide services effectuating exchange transactions in crypto-assets for, or on behalf of customers to report under the CARF. This is expected to increase transparency of such transactions.
This is a welcome move that could create a level playing field for all stakeholders, especially when some countries are excited about leveraging the crypto trend and some others are sceptical about the potential misuse of cryptos. As far as theory goes, the OECD announcement of a new transparency framework for crypto transactions will enable timely tracking of information and ensure that regulatory and tax compliances are adhered to across jurisdictions.
From April this year, India had introduced a 30% tax on capital gains made from cryptocurrency trades. While the move was seen in positive light and signalled the country’s embracing of the virtual currency, the players saw it as a move to discourage potential investors. The government then further imposed 1% tax deducted at source.
Why is the government worried about cryptocurrencies
Finance Minister Sitharaman wasn’t the only one who wanted international collaboration for regulating cryptocurrencies. Before her, Prime Minister Narendra Modi had also highlighted the need for the same, saying democracies need to work together and ensure that cryptocurrencies do not end up in the wrong hands. There are also concerns about the rising trend of crypto investing and about the potential misuse of crypto assets for money laundering and funding terrorism.
Cryptocurrencies also have volatility issues as they are not regulated. To put this simply, there is no grievance redressal if someone’s chosen crypto goes from say $5,000 a piece to $50 in one day.
Crypto markets are in turmoil in India and across the world. RBI has been on a rate hike spree to curb inflation that has led to a drop in liquidity. The rising dollar index has caused a fall in trading activity in cryptos. The same also means that cryptocurrencies are currently not enjoying the valuations they enjoyed once. Bitcoin has lost 40% of its value this year while the losses of Ethereum is around 50%.
Bitcoin and Ethereum are currently trading around $19,000 and $1300, down from the highs of $68,000 and $4,891 in 2021. The carnage in smaller coins is much steeper. While trading volumes and crypto prices are down globally, there are several domestic factors that put a question mark on the future of cryptocurrencies in India. However, a regulatory framework is expected to serve all players.