Regulation
Our approach to regulating cryptocurrencies needs clarity
In March this year, Sam Bankman-Fried, founder of the now-defunct crypto exchange FTX, was sentenced to 25 years in prison for fraud and conspiracy. In an email interview with ABC News a few weeks later, he wrote: “That’s the main thing I think about every day.” »
That’s certainly what many others think too. Prosecutors say conservative estimates of losses from this fraud are $8 billion for FTX customers, $1.7 billion for FTX investors and $1.3 billion for lenders. from Alameda. Once the richest and most influential man in the crypto industry, Fried or “SBF” was the creator of the successful crypto trading exchange FTX and trading company Alameda Research. His crypto empire collapsed in November 2022, following multiple acts of financial fraud and deception, all led by him.
The collapse of FTX marked a hellish period for cryptocurrencies which reached their lowest level in several years. After peaking at $3 trillion in November 2021, the FTX debacle saw the value of the overall crypto market plummet to its lowest level in two years at $796 billion. It also triggered a much-needed regulatory crackdown.
Here in India, the relationship between regulation and crypto has remained sooty at best. The three main protagonists in the history of cryptocurrencies – the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) and the government – have at different times had diametrically opposed views on cryptocurrencies. Of the three, it is clearly the central bank that has always been the most vehement in its criticism and distrust of the crypto ecosystem.
However, it is the government which seems to have got itself into difficulty, as well as its political action. A bill on cryptocurrencies has been in preparation since 2021, but has still not seen the light of day. What happened in its place in 2022 was a fiscal blow. Cryptocurrency trading in India attracts a 1% tax withheld at source (TDS) as well as a 30% capital gains tax, with no provision for crypto loss compensation.
The government classified crypto assets as “virtual digital assets,” while refusing to answer the controversial question of whether they were legal or not. “Whether it’s legitimate or illegitimate is another question. But I will tax [crypto gains] because it is a sovereign right to tax,” said Finance Minister Nirmala Sitharaman on this subject.
For an industry that has often resembled the dotcom bubble in its narrative, regulation in India has consistently shied away from addressing the who, what and how of crypto. Crypto proponents swear it’s the answer to financial democratization and crypto skeptics say it’s just fraud written with a “c.”
When I started gathering numbers on cryptocurrency trading in 2021, data from research firm Crebaco showed that around 15 million Indians had invested in cryptocurrencies through Indian exchanges. New registrations led to a nearly 150% monthly increase in trading volumes.
The government and policymakers were visibly nervous. Crypto was popular with the younger generation and there were a series of incidents visible across India involving kidnapping, extortion, money laundering and drug deals where crypto coins were the weapon or the ransom currency of choice.
So even though a clear policy eluded crypto, two decisions were made. The first was a heavy tax, perhaps intended to dampen commercial enthusiasm; the second was a notification issued in March 2023 that brought cryptocurrencies and other digital assets under Indian anti-money laundering law. The PMLA’s intention here was to combat money laundering by essentially placing the onus of transparency and controls on Indian cryptocurrency exchange platforms.
However, things did not go as planned. By the end of 2023, a report by think tank Esya Center reveals that around 3-5 million Indian users have shifted to offshore platforms, resulting in transaction volume worth 3.8 billion dollars outside national stock exchanges. This is a loss of users and taxes. Clearly, neither the 30% tax nor the inclusion of PMLA has been a deterrent for those trading cryptocurrencies; only a nuisance. A problem that connections to private networks helped to circumvent.
Even though the Ministry of Information Technology has blocked access to foreign platforms like Binance, Kucoin, and Bitfinex, India-based crypto platforms and entrepreneurs have quietly moved their operations to places like Dubai, likely because neither Indian politics nor the stress of remaining based in India no longer seemed appealing. .
As the Indian crypto industry continues to play a guessing game over regulation, what is clear is that our lack of policy clarity has never helped. The United States has learned the hard way that it needs to do more than just fight a flood of crypto-related litigation. The UK, EU, Singapore, Japan and Australia have made progress in establishing compelling regulatory frameworks for digital assets.
For India, the first step will be to identify who is in charge. Should it be Sebi, which has jurisdiction over other financial markets? Should it be the RBI, which is our banking regulator and monetary authority? Or should it be another, hybrid body with financial and digital oversight? However, the biggest regulatory question isn’t who. That is why.