The Indian government announced last month that it would be banning all cryptocurrency activity in the country. The most recent development however suggests that there won’t be an outright ban, but instead stringent regulation. It is estimated that India has the highest number of crypto owners in the world with more than 100 million individuals involved in the market.
Now home to a number of exchanges such as WazirX and ZebPay, cryptocurrencies have grown in prominence especially over the last few years. Companies are seen advertising at the IPL and other major televised events which are premium advertising slots. They are even able to get actors and cricketers to endorse them, sometimes going to the extent of suggesting that there is easy money to be made. With such a presence, it is understandable why the government would want to regulate the market.
To this end, a draft cryptocurrency bill has been drawn up which suggests that cryptos will not be allowed to operate as a currency and will instead be defined as an asset. As a result, all activities that relate to the medium of exchange, store of value, and unit of account will be prohibited. Those found violating the rules may be subject to a fine of up to Rs. 20 crore and a jail term of 1.5 years. The regulatory burden will fall on SEBI.
One of the primary motivations to regulate cryptocurrency activity has to do with the prohibition of funding illegal activities. The government has been concerned about the potential of crypto to fund terrorism in particular. This is why they have thus far assumed a no-tolerance stance. Given the size of the market, however, and the rise of exchanges, it makes more sense for regulation than an outright ban. In this way, crypto-assets can be taxed in the same way that equities are taxed. The country’s largest stockbroker Zerodha, for example, has around 7 million users. CoinSwitch and WazirX together boast nearly 20 million users.
Countries around the world have taken varying stances on cryptocurrencies. Some have more favourable environments while others are extremely cautious. Many also lack clarity on where they stand. The US is one such example. Due to its dual legislative system, the laws across states and at the federal level vary. Places like Wyoming and New York have sought to officially recognise crypto businesses by granting licenses. At the federal level, however, the SEC describe cryptos as a security while the Treasury views them as currency. The Federal Reserve recently released a statement wherein it recognised that crypto-assets were an emerging sector and as such it would provide clarity on its stance in order to promote consumer protection. Currently, crypto exchanges are regulated and assets are taxed by the IRS.
The UK, similar to what the Indian government is proposing, considers cryptocurrency as an asset but not as legal tender. The assets can be taxed and exchanges must register with the FCA (Financial Conduct Authority). The FCA has issued warnings on many an occasion to investors to act with caution when trading in cryptos but the government is yet to come out with a comprehensive legislative structure.
Within the EU, cryptos have a legal status throughout and exchanges are regulated by the individual member nations. Taxation also varies along the same lines. The EU however has made a note of the fact that there are various types of crypto assets such as utility tokens, asset-referenced tokens, and e-money tokens and therefore aims to come up with category-specific regulations
South Korea interestingly does not tax gains made from trading cryptos as it does not recognise them as currency or as assets. Exchanges are regulated and must register with the authorities and acquire a license. It has recently tightened its grip on the crypto market by recognising only 28 exchanges in the country meaning that over 30 other exchanges that exist in the country are currently illegal. There is speculation that the government may levy a 20% tax on crypto income in the future, but the details are not clear as yet.
El Salvador became the first country to recognise crypto as legal tender within the country earlier in the year. This resulted in chaos due to the high levels of volatility that cryptos routinely experience. Given the already poor economic situation that the country finds itself in, allowing cryptos to be used as a currency will only cause more problems. Moody’s downgraded the country’s debt as a result and the spread that the country must pay between its debt and the US Treasury rate also went up.
Other countries like Venezuela have also seen the use of Bitcoin as a currency increase in recent times. This is not a good sign as it reflects poorly on the country’s actual currency and as we already know, Venezuela is currently undergoing a period of crisis. It is understandable why countries will not want to allow cryptos as legal tender as the market can not be regulated to meet the country’s monetary and fiscal policy needs. On top of this, concerns have recently been raised about the environmental damage that mining cryptocurrency has. There is an enormous amount of energy required to conduct mining operations and China recently banned mining in its country which led to a sharp decline in the supply of cryptos as 75% of the world’s mining occurs there.
China started off by having a favourable view of crypto but in recent years has reversed its position to that of caution. It sees the potential in blockchain technology, like most other countries do, but does not otherwise offer any support to the market. People can still hold and trade crypto assets but Initial Coin Offerings (ICO) have been completely banned.
India’s decision seems to be in line with what some other countries are doing. It is not actively supporting the crypto market but recognises that there are too many people involved for it to ban them outright. With such a large number of market participants, taxing the asset holders will make for a useful source of income.