Why Crypto’s Rough Year In India Just Got Worse

India’s latest cryptocurrency rulings foreshadow turbulent times for the country’s fledgling but booming digital currency industry.

During its launch event in India on April 7, US giant Coinbase announced that its Indian investors could use the country’s popular online payment system, UPI, to transfer funds to its local stock exchange. The pronouncement launched the exchange in the second largest internet market in the world.

But hours later, the National Payments Corporation of India (NPCI), the regulatory agency that oversees UPI, released a concise one-sentence statement claiming that he was unaware of any cryptocurrency exchanges using the payment system.

Just three days later, Coinbase was forced to suspend all cryptographic payment services in India. The rapid and dramatic change deprived Coinbase customers of the means to finance their accounts with rupees, jeopardizing the company’s expansion plans before they started.

The debacle is the latest example of the regulatory uncertainty facing cryptocurrency exchanges in India despite, or perhaps as a result of, its popularity in the country.

A cryptographic boom in India

Cryptocurrency in India has come a long way in a short time. Digital currency exchanges were virtually non-existent in India five years ago. Now, about 15 to 20 million investors have more than $ 5.3 billion in crypto, according to a Reuters report, citing industry estimates, which represents the second largest number of crypto traders in the world. Virtual assets have gained special traction among India’s millennial population.

The growing success of cryptocurrency in India has spawned several successful indigenous exchanges, such as WazirX, ZebPay and CoinDCX. It has led foreign heavyweights such as Coinbase to establish operations in the country and invest significantly in their domestic counterparts.

According to a report released last year by the blockchain data platform, Chainalysis, India ranked second among the nations that experienced the fastest growth in the use of digital currency, with the Indian market growing by 641% during the period between July 2020 and June 2021.

Confusion and regulatory uncertainty

The rapid success of cryptocurrencies in India has led to the demand for industry regulation, even from the industry itself. The cryptographic sector has sought a stable business environment governed by clear and predictable regulatory and political regimes.

“Regulators internationally recognize legitimate uses for cryptocurrencies and are developing regulatory standards for countries to use as guidelines to regulate the industry,” explains Laurel Loomis Rimon, partner and cryptography expert at Paul Hastings LLP.

Instead, New Delhi has created a Byzantine regulatory framework that leaves basic questions unanswered, including whether trading in cryptocurrencies in India is legal.

In 2018, India effectively banned all cryptocurrency trading, instructing the country’s banks not to provide service to customers exchanging digital currencies. Although the Supreme Court overturned the ban in 2020, the government, led by the Reserve Bank of India (RBI), has continued to hide its discomfort with the crypto. Senior officials have expressed concern that cryptocurrency could jeopardize India’s economic stability while facilitating terrorist financing and money laundering.

Last November, Indian lawmakers drafted legislation that sought to ban the trading of cryptocurrencies, but introduced it after panic in the sector and falling digital token prices.

Taxation without legalization

In February, Indian Finance Minister Nirmala Sitharaman announced plans to launch his own cryptocurrency next year, while introducing two new digital currency taxes: a staggering 30% tax on revenue generated by cryptocurrencies and a separate 1% tax on the “source in all transactions.” ”, Which would be imposed on the exchange itself.

“There has been a phenomenal increase in transactions in virtual digital assets,” Sitharaman said. “The magnitude and frequency of these transactions have made it imperative to anticipate a specific tax regime.”

The impact was rapid. India’s trading volume has fallen by almost 70% according to industry data, and some stock exchanges have experienced more than 90% falls in recent weeks.

Industry experts have begun to warn of other far-reaching consequences for the cryptocurrency industry, including a brain drain and a nationwide liquidity crisis. Despite this, many experts claimed that the government had finally legitimized cryptocurrencies in India by imposing new taxes.

On Twitter, Binance stated triumphantly: “Crypto has just become legal in India! The Indian government has removed the confusion in the form of a tax law on cryptographic assets.

Nischal Shetty, founder and CEO of WazirX, was more measured, but argued that “India is finally on track to legitimize the cryptocurrency industry in India” and expressed hope that the new taxes would remove “any ambiguity for banks and them.” can provide financial services to the crypto industry “.

Shetty’s hope seems wrong. Sitharaman pointed out that the government’s decision to tax digital currencies did not mean that they were suddenly legal. “I do not expect [until] regulation comes in to tax people who are making a profit, ”he noted.

Finance Secretary TV Somanathan went on to say: “Bitcoin, Ethereum or NFT will never be legal tender” and reflected New Delhi’s position by pointing out that the government was taxing profits at the same rate as ” horses, or betting and other speculation. ” transactions ”.

RBI Deputy Governor T. Rabi Sankar went even further, warning in a recent speech that digital currencies “can be even worse … than a Ponzi scheme” and concluded that “banning cryptocurrency … is the option more advisable for India “.

What Crypto Companies Need to Know

What should cryptocurrency companies know given the absence of a clear regulatory framework to guide India’s digital currency sector?

First, stock exchanges operating in India are unlikely to get clarity from the government any time soon. The relevant draft legislation remains inactive and the central government has not yet issued any actual regulations on digital tokens. Speaking recently at Stanford University, Sitharaman summed up the sentiment in New Delhi succinctly, simply pointing out that the government’s approach to cryptography “cannot be rushed”.

Second, cryptographic exchanges would be prudent to hire external advice given this ongoing regulatory uncertainty along with the government’s willingness to tax the sector. Recently, New Delhi has indicated its intention to levy an additional 20% tax on earnings on cryptocurrencies from platforms outside India. It is unclear what this means in the long run for the industry. “One of the first challenges in regulatory oversight of cryptocurrency is the need to identify what existing laws and rules apply and where to enact completely new laws,” Rimon said. Proper law firm can help companies navigate the evolution of the tax and regulatory regime and help the exchange avoid costly operational and legal errors.

Third, despite these formidable challenges, India continues to deliver significant promise for cryptocurrency exchanges. Companies like Coinbase acknowledge that India’s population is changing younger while internet penetration and digital asset adoption rates will only continue to rise. Exchanges will have to assess how long they are willing to wait and what they are willing to tolerate from New Delhi in light of recent events.

(Disclosure: Binance announced strategic investment on Forbes on February 10, 2022.)

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