The government has always supported policies that align with the changing technological landscape. The cryptocurrency bill and budget announcements are efforts by the legislature to dispel its position in the growing cryptocurrency market. Before delving into the specific nuances, it is imperative to understand the various components that form the building blocks of the technology that cryptocurrency runs on.
Why Blockchain is in the spotlight
Blockchain is in the spotlight because it is a technology capable of digitally evaluating the trace of a document with the click of a button. The entire cryptocurrency network and recently popularized NFTs (Non-Fungible Tokens) run on the blockchain.
The definition of cryptocurrency under the bill has drawn a lot of criticism for its overly broad interpretation of what constitutes cryptocurrency. This ensures an overview of different types of cryptocurrency, including but not limited to public, private, licensed, consortium, etc.
Legality of cryptocurrencies
Another reason why it is difficult to objectively judge the legality of cryptocurrencies is due to the key layers and participants involved in the cryptocurrency market. An examination of the role of each player in the cryptocurrency market ultimately helps to assess whether a certain transaction is part of fees or funds.
Coin investors, inventors, miners, nodes, exchanges, traders, hash power rental companies, utility companies, casual consumers, wallet providers, offerors of coins etc are all major players in the game. The proposed regulations and policies regarding cryptocurrencies pose a direct threat to most participants in business activities in India.
NFTs are winning in the digital market
NFTs or non-fungible tokens have acquired an undeniable place in the digital market. They provide some sort of ownership over something as well as exclusive rights over that entity. Said entity that is offered could be anything from a beach house in Miami to maybe even historical landmarks like the Taj Mahal that one could own and access in part through these NFTs. The value of the token increases and decreases with the value of the entity over time.
Need for regulation
The ever-changing nature of these transactions and the value of the underlying assets raises the fundamental question of implementing a blanket ban on cryptocurrencies. The pragmatic alternative could be regulation that proves mutually beneficial for all parties involved in cryptocurrency transactions, including the government. Cryptocurrency regulation will reinforce the government’s goal of ensuring that the Indian investor and consumer do not suffer the bloodbath that awaits them should their intrinsic value be lost.
Government proposals to make crypto legal tender
The cryptocurrency bill and budget announcements have given food for thought, especially regarding the potential taxation of cryptocurrency. Several issues with cryptocurrency trading have yet to be debunked. One of these areas is GST assessment for trade i.e. total sale value or trade margin.
The 2022 budget announces the introduction of digital rupee or central bank digital currency (CBDC). The proposals effectively make cryptocurrency legal tender when issued by the government while banning the use of private virtual coins. Provisions that have been highly noted by investors include the imposition of a 30% tax on trading margin and 1% TDS on proceeds from virtual asset transactions. While the high tax rate may not bother the class that is already in that tax bracket, the virtual asset gift tax and no deduction for lost assets will certainly give sleepless nights. . Capital gains compensation will also remain a topic of discussion in the coming days.
The government’s intention is not only to protect the interests of investors, but also to improve the fiscal buoyancy of these transactions. It is undeniable that these technologies make us very vulnerable to challenges in the form of cyber attacks, money laundering, terrorist based financing, etc. is implemented.
The latest tax announcement in Budget 2022 is another indication of pragmatically addressing this complex issue without compromising technological advancements. The inclusion of cryptocurrency in the highest tax bracket can be seen as a green signal to trade in the absence of regulation and seems to herald a slow but sure path to legitimizing such transactions.
(The author is partner. Khaitan & Co. Kanika Sharma, partner, Khaitan & Co. also contributed to the article. Opinions are personal)
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Posted: Wednesday February 2nd 2022, 09:32 IST