Indian crypto-enthusiasts now have an uphill battle to hold on to their crypto-fortunes as taxmen, regulators and cyber-criminals breathe down their necks. In these uncertain times, a well thought out and progressive legal framework would go a long way in putting anxieties to rest, and may help India move towards a more inclusive and efficient financial system
After an unprecedented run in 2017, India’s cash-rich cryptocurrency investors now face an uncertain future. Earlier this month, the Finance Minister’s budget speech, and one line in particular, created headlines in the national press and resulted in Bitcoin prices plummeting to a two-month low of $8,800 (from an all-time high of $19,343 in December last year). Mr. Jaitley treaded carefully, and made no mention of a ban or, in fact, any regulation. However, the tone of his speech left no room for doubt as to the Indian Government’s unfavourable stance on cryptocurrencies. Reiterating previous warnings issued by the Reserve Bank of India (RBI) and the Ministry of Finance, Mr. Jaitley stated that the Government of India does not consider cryptocurrencies as legal tender, and that it will take all measures to eliminate the use of such currencies in financing illegitimate activities or as part of the payment system. The first two components of this statement surprised no one. Most governments around the world (with the notable exception of Japan) have refrained from recognizing cryptocurrencies as legal currency or tender. Similarly, clamping down on the use of such currencies for illegal activities has been the unconcealed objective of most governments. However, the reference to cryptocurrency’s role in India’s ‘payment system’ has raised eyebrows, and is suggestive of the Indian Government’s approach towards such currencies in forthcoming regulations. Given that the RBI presently oversees policy formulation and governance in the realm of payment systems, Mr. Jaitley’s statements indicate that cryptocurrencies may soon come under the purview of India’s central banking regulator.
Given the absence of laws expressly permitting, prohibiting or regulating cryptocurrencies, such currencies remain, at present, neither legal nor illegal. Recent reports suggest that the Ministry of Finance is drafting a comprehensive regulatory framework that would, among other things, clearly define the roles and jurisdiction of India’s financial regulators. However, so far, the content and timelines for such regulations remain unclear.
The Finance Minister’s statement reflects an uncertainty that has engulfed the country’s cryptocurrency ecosystem, and comes at a time when foreign governments appear to be hopping on the blockchain bandwagon. Switzerland, for example, has embraced blockchain, and has been pulling out all stops in its attempt to become the world’s first ‘crypto-nation’. True to its pro-business reputation, Switzerland has successfully attracted some of the world’s largest ‘initial coin offerings’ (ICOs), a process whereby start-ups raise funds for their crypto-offerings by issuing virtual tokens or coins.
Similarly, and in stark contrast to the Indian position, Malaysia’s Finance Minister has categorically stated that the Malaysian central bank – Bank Negara, would not impose a ban on cryptocurrencies, including bitcoins, but would instead harness the potential innovations that such products could bring to the financial sector. Bank Negara, proposes to release a concept paper later this month focussing on the transparency and disclosure obligations of entities offering cryptocurrencies, thereby allowing the public to decide whether or not to invest in such offerings.
Apart from regulation, the other matter that has kept crypto-enthusiasts on tenterhooks is the Indian Government’s stance on the taxability of gains generated from their investments. Soon after the budget speech, the Income Tax Department reportedly issued more than 100,000 notices to resident investors for failing to disclose their cryptocurrency investments in their IT returns. In fact, the Chairman of India’s Central Board of Direct Taxes (CBDT) expressly clarified that Bitcoin investors will now need to pay taxes on their earnings. But owing to a cryptocurrency’s unique characteristics that resemble both a security and a currency, significant ambiguity exists as to its taxability. For instance, there are conflicting views on whether profits generated from frequent trading in bitcoins should be taxable as business income, as opposed to capital gains. Similar ambiguity exists as to the taxability of bitcoins that are not purchased, but instead earned through the process of ‘mining’.
In its first ever list of cryptocurrency millionaires, Forbes recently disclosed the names of some of the world’s most successful cryptocurrency idealists, builders, opportunists and investors. This crypto-rich list was topped by Ripple co-founder Chris Larsen, whose crypto net-worth has been estimated to be $7.5-8 billion. But only a few days after this publication, Forbes reported the theft of an estimated 17 million ‘Nano coins’ (worth approximately $132 million) from the Italian cryptocurrency exchange ‘BitGrail’. These articles illustrate the promises and pitfalls on offer in the crypt-world, and highlight the underlying reasons for an investor’s unquestioning faith and a regulator’s wariness for cryptocurrencies.
Indian crypto-enthusiasts now have an uphill battle to HOLD on to their crypto-fortunes as taxmen, regulators and cyber-criminals breathe down their necks. In these uncertain times, a well thought out and progressive legal framework would go a long way in putting anxieties to rest, and may help India move towards a more inclusive and efficient financial system.
Authored by Sajai Singh, Partner, J. Sagar Associates and Yajas Arvind Setlur, Associate, J. Sagar Associates