When Blockchain (a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system) was introduced in 2008, the introductory paper by Satoshi Nakamoto said: “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model.”

Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin’s original reference implementation. As part of the implementation, Nakamoto also devised the first blockchain database.

Eventually, bitcoin was created — exactly the way Nakamoto had envisioned – to serve as an entirely online currency that could be cryptographically secured and made irreversible. While the world was taken by surprise with how quickly cryptocurrency became the new obsession, it took Indians a while to unofficially fall in line and tap into the action. The past few years have seen more and more young people learning how cryptocurrency works and experimenting with the available resources.

When cryptocurrency entered the Indian market, it attracted huge numbers of speculators and investors, resulting in a massive surge of value and volumes on cryptocurrency exchanges. Since it is an untapped and unregulated financial instrument having a potential of over a trillion dollars in the country it has gained significant traction. However, the regulators and authorities have kept a close watch on cryptocurrency in the country and from time to time have taken appropriate action.

The buzz now is about a bill to be introduced shortly in Parliament concerning the regulation of cryptos. Manoj Dalmia, Founder and Director of Proassetz Exchange, says that “As per our thoughts, the classification and intent of taxing the earnings from crypto at a specified rate on trading might get approved by the Cabinet.”

The issues with the investors had been paying taxes under other sources or classifying it as capital gains already. The government has been indicating that India may approach the regulation favorably. It may be possible that the earnings from cryptos may attract both direct and indirect taxes.

Crypto assets may likely be taxed as per the rules of capital gains and it may attract the usual GST, as most services are. Moreover, there may also be talks of charging a 1% tax on trades.

On November 18, while addressing the Sydney Dialogue Prime Minister Narendra Modi said: “Take cryptocurrencies, such as Bitcoin, for example. It is important that all democratic nations work together on this and ensure it does not end up in the wrong hands, which can spoil our youth.”

Dalmia emphasises that this may not be a negative comment, but a welcoming and insightful thought emphasised by PM Modi that genuine and eligible players and exchanges must work together under government regulation and guidelines to ensure that cases of fraud and deception are mitigated and a clear view of policies can guide investors towards genuine investment opportunities and platforms.

Kunal Chowdhry,CEO and Executive Director of Apollo Investments Singapore, says, “The digital rupee will be a central bank digital currency, which is not decentralised as it will be controlled by the RBI. When it does roll out, it would be recognised as legal tender, but in a digital form. When it reaches full adoption, we would see, in theory, a cashless India! Of course, this would take time.” He says that the main advantage of having a decentralised cryptocurrency like Bitcoin as legal tender is that it is, in effect, an anti-inflationary system! For, there will only be 21 million bitcoins ever mined.

Because of its limited supply, the value of Bitcoin has maintained an upward trajectory since it launched in 2009. Even though it has maintained an upward trajectory, Bitcoin faces short-term volatility, which is a factor Governments have to consider when having decentralized cryptocurrency as a legal tender. The $100 paid in bitcoins may suddenly only be worth $65 the next day! In this case, accepting cryptocurrencies as legal tender is a two-edged sword.

Durga Prasad Tripathi, founder & CEO of Fesschain, adds: “This means that you cannot walk up to a restaurant, have a meal, and expect to pay in bitcoin. Of course, some commercial establishments can and have started accepting payments in  cryptocurrencies, but such a decision is purely their own and cannot be forced upon them. This also means that you cannot go to a bank, and ask for your cryptocurrency to be converted into rupees. Such a transaction can only take place at a  cryptocurrency exchange, where willing buyers and sellers exchange cryptocurrencies for rupees.”

Any form of income is taxed by the government, and cryptocurrency is no different. Crypto trading is likely to see a formal taxation structure as the Union Ministry of Finance has reportedly formed a committee to find out if income made by crypto-trading could be taxed.

Ankit Agarwal, Managing Director of Alankit Ltd, says: “Cryptocurrencies such as bitcoin created by mining are self-generated capital assets. However, one may note that the cost of acquisition of bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets. Hence, no capital gains tax would arise on the mining of cryptocurrencies.”

Cryptocurrency Taxation

Holding Period Taxation

Less than3 Year Short Term As per Tax Slab

More than3 Year Long Term 20%

The Reserve Bank of India (RBI) intends to introduce its first digital currency by December of 2021. It is currently researching many elements of digital money, comprising its security, economic impact, and influence on the existing currency.

“Central Bank Digital Currency is a digital form of currency that is similar to the currency we carry in our wallets. The CBDC held by the central bank will be supervising the digital wallets. Banks may be given some authority over the digital rupee in India, while the RBI will oversee it. However, no clear statement has been given by the RBI so far… Nonetheless, the RBI is most likely to make a start to promote its digital currency.

The major reason behind it is the systematic tracking of the digital currencies unlike conventional or physical cash by the RBI, ergo, the regulation and tracking of digital currency are pretty simpler than the actual cash,” says Agarwal. Of course, at the centre of all the debate is how profitable cryptocurrency trading already is. Crypto ‘mining’ is the process of creating new coins to trade with, and verified traders are awarded these coins as their reward for carrying out secure trades. To successfully mine a profitable amount of crypto coins, miners need to have the required technology.

Agarwal looks back to when the pandemic hit, and bitcoin and ethereum saw a surge in popularity. He says that the acquisition of ‘mining equipment’ is a demanding process. “Miners can profit if the price of cryptocurrency exceeds the cost to mine, with recent changes in technology and the creation of professional mining centers with enormous computing power as well as the shifting price of cryptocurrency itself.” says Tripathi.

Some of the main talking points regarding cryptocurrency have been around on how it will impact the Indian economy on a larger scale. Rashid Ali, Managing Director and Technology Head at Ezeepay, says that cryptocurrency can cause financial instability.

“There is a big difference between using technology for financial inclusion and using cryptocurrency, the latter could potentially lead to financial instability across the country. In the words of RBI Governor Mr. Das, ‘The technology (blockchain) is more than 10 years old; it did not come yesterday. The technology will grow and can grow without cryptos’. I am in full agreement with what he mentions as cryptocurrency is not an easy thing to adopt as it is accompanied with some serious issues and complications which need time for their redressal. These cannot be talked about in a day and require deep thoughts and discussion. There needs to be a properly set frame of regulations to channelize and regulate crypto. As a part of a fintech entity, I completely agree with our RBI governor’s point of view that, ‘risks ultimately lie in the books of banks and NBFCs and hence the collaboration should be appropriately strategized’.”

Cryptocurrency comes with major issues like scalability, cybersecurity issues and price volatility. Practically all of the good and bad times of the cryptocurrency rely directly upon the announced assertions of the Governments of various nations. This volatility or instability creates systemic risk for the investors/speculators. These problems can only be addressed through strict regulations and strict monitoring guidelines.

Agarwal also mentions the huge risks of investing in cryptographic money that ought to be considered with this financial instrument. “It is our perspective that the rundown of digital currency or cryptocurrency such as bitcoin drawbacks are significantly higher, and are unidentified with the threats of money laundering, terrorist financing, and other criminal financing and related activities, lack of a central issuer or regulatory framework, which implies that there is no lawful conventional entity to guarantee in the event of any liquidation or bankruptcy, and the likes of it.” It is almost impossible to enable a fluid economy anchored by cryptocurrency without reviewing existing regulations and incorporating new ones.

“Unlike conventional banking methods, the validation of cryptocurrency payments does not require the inputs of central authorities or third parties. Both sides of a transaction can execute payments directly from their wallet and watch it get validated by other network participants. In essence, the validation process of cryptocurrency transactions is not governed by a single entity. As such, it is technically impossible to censor or reverse transactions. This approach lets all affected industries understand and establish standards necessary for processing, exchanging and accepting cryptocurrency. For instance, a cryptocurrency-anchored economy requires a universal rule for setting cryptocurrency-denominated prices for goods and services,” adds Tripathi.

Dalmia provides an insight: “If you remove the noise around crypto assets and focus on a simple definition, you find that these are just limited entries in a database which is decentralised and no one can change or modify it without fulfilling specific conditions. This may seem ordinary, but this is exactly how you can define a currency.

Unfortunately the fluctuations in price and rarity give it the characteristics of a rare commodity, rather than a stable currency. Crypto assets are built on cryptography. They are not secured by people or by trust, but by math.” In any case, even though it is undeniably challenging to foresee, numerous  academics and experts of this topic guarantee that the eventual fate of cryptocurrency and Blockchain Technology is brilliant if it is suitably regulated with required ‘checks and balances’ in the operational framework.  Since this technology holds the potential to eliminate trade barriers and intermediaries, it would diminish the expense of transactions, and thus support the trade and the economy if brought under the global financial regulatory framework, says Agarwal.

Centre, cryptocurrency and crypto investors

The Centre is likely to bring a Bill in the winter session of Parliament to prohibit all cryptocurrencies in the country, barring a few exceptions, and create a framework to regulate the digital currency to be issued by the Reserve Bank of India (RBI).

Currently, El Salvador is the only country to recognise cryptocurrency as legal tender.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is listed for introduction in the Lok Sabha during the winter session, scheduled to start from November 29. The Bill seeks to “create a facilitative framework for the creation of the official digital currency to be issued by the RBI. It also seeks to prohibit all private cryptocurrencies in India. However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

The Reserve Bank has previously voiced “serious concerns” about private cryptocurrencies. Bitcoin, the world’s biggest cryptocurrency, is hovering around $60,000, and its price has more than doubled since the start of this year, attracting hordes of local investors. Industry estimates suggest there are 15 million to 20 million crypto investors in India, with total crypto holdings of around ? 40,000 crore ($5.39 billion).

Private digital currencies have gained popularity in the past decade or so. However, regulators and governments have been skeptical about these currencies and are apprehensive about the associated risks.

On March 4, 2021, the Supreme Court had set aside an RBI circular of April 6, 2018, prohibiting banks and entities regulated by it from providing services in relation to virtual currencies. There is talk that the Centre is considering a proposal to treat cryptocurrencies as a financial asset while safeguarding small investors.

Find here more articles by Mr. Ankit Agarwal – Managing Director, Alankit Limited

Original Resource: https://pynr.in/article/in-focus-the-allure-and-pitfalls-of-cryptocurrency