By Rashmi Deshpande
Given the amount of revenue being generated from trading of crypto assets in the recent few months, it is rather impossible for anyone to ignore the sector anymore. The public at large, due to attractive profits, has heavily begun investing in these assets, while the “techies” and entrepreneurs have built up businesses around them. Considering the potential of the underlying technology, the adoption of blockchain for transfer of money, record keeping, and many more aspects of everyday life do not seem to be a far-fetched dream.
As the sector grows, provides investment opportunities, generates employment, and adds to the nation’s gross domestic revenue, there definitely comes the need to protect the interest of all players, which includes not only the investors but also the allied businesses. In addition, regulations also bring in clarity as to where the law makers stand when it comes to recognizing the legitimacy of any industry. It is also a protection for all businesses built in and around the sector, as no mere executive act of any of the Government departments by issuing a notification or a circular questioning the legitimacy of the sector, unreasonably restrict its business transactions [for instance, the RBI circular dated 6th April 2018 (the Circular) and the Supreme Court order quashing the Circular].
Besides, the sector is not under constant fear of being declared illegal resulting in complete ban of operations, as we are experiencing now, based on news doing the rounds, that private currencies may be banned by an act of the Parliament. Thus, clarity on laws and regulations brings in certainty and longevity to every sector while protecting the interest of all stakeholders.
Current Legal Structure in India
As we stand today, there is no piece of legislation that has identified these assets. Neither the circular nor foreign exchange regulations give recognition to Bitcoins, Ethereum or the likes as currencies for dealings within the country or cross-border transactions. In terms of income tax laws, there is no clarity if crypto assets could be termed as capital assets. The goods and services tax, which has a relatively new legislation, has not termed them either in the category of goods or services. When the crypto assets are being traded on exchanges, the transactions are not currently governed by the Securities and Exchange Board of India (SEBI) or any other regulator. There is also no legal recognition to transactions like Initial Coin Offerings (ICOs).
The closest crypto assets have come to be mentioned in any regulations is the Circular, which directed the banks to withdraw the support provided to crypto exchanges which was of course later challenged in the courts.
The Supreme Court’s judgement of March 2020 was a detailed one and struck down the Circular, upholding the fundamental right of practicing one’s trade and business. While the case was still in progress at the apex court, the Government made public a draft bill for banning of crypto currencies. The bill proposed heavy penalties and punishment on mere possession of crypto currencies. However, post the milestone judgement of the Supreme Court, the bill was never tabled at the Parliament.
This is where the industry was hopeful that perhaps after the historical decision, the Government was perhaps re-thinking its stand and open to start a communication channel with the industry. However, the proceedings during the Budget session of 2021 in the Lok Sabha changed the positive waves created by the Supreme Court judgement. The Government announced its decision that it would ban all private currencies and would only encourage the central bank digital currency (CBDC).
Yet again the investors, the businesses developed around crypto assets are on tenterhooks waiting to see if the Government actually tables the bill.
Efficacy of any Bill Banning Crypto Assets
Assuming that a bill banning crypto assets is actually passed by the Parliament, could it actually be implemented? The very first victims could very well be the crypto exchanges and, thereafter, the investors who have invested via these platforms. As these exchanges are based in India, it will be easy to shut down their businesses. However, if the ban is on possession of crypto currencies, these exchanges were the only way the Government could have found out how much the traders were trading and the value of currencies in their possession. Once the exchanges stop operating, the Government will have no other way of monitoring such transactions when investors resort to private wallets operated from outside India.
Currently, there are legitimate businesses created in and around this technology, which is also resulting in tax revenue for the Government (although few clarifications on that front are desirable). The sector is only to grow every year generating future revenue which will all be lost if the ban is introduced, not to mention the loss of employment for many players and the setback India will experience in terms of the technology.
Case for Regulations
One cannot ban the internet. Crypto assets too fall under such a category. However, what can be regulated, are the businesses. To begin with, there should be a central authority, say on the lines of SEBI, to not only draft rules around clean trading but also regulate the players. This will ensure that only genuine players with authentic technologies enter the sector. The central authority will also be able to control products like ICOs, tokens giving a boost to raising funds in a more innovative manner.
The interest of investors will have to be safeguarded by putting in place investor protection policies. KYC norms, as provided for banking clients, are also an effective tool for the Government to monitor the flow of funds and, in turn, review the taxing statures.
Bringing the sector under information technology regulations, data protection norms will make the businesses more transparent and improve the image for hesitant investors.
While some of the concerns of the Government are genuine, the solution will be not to ban the sector but to understand its fundamentals by engaging in a continuous dialogue with the relevant players. An informed regulation would be more effective in the long run for the sector and the country at large.
(The author is a Partner, Indirect Tax, at Khaitan & Co. Views expressed are the author’s own.)