Despite repeated cautions by the Reserve Bank of India and the Finance Ministry about the risks associated with investing in cryptocurrencies and their illegality when used as actual currency, the crypto-industry is still pretty enthusiastic about India and maintains that even the government’s negative stance has been exaggerated.
The RBI has issued three warnings about cryptocurrencies since 2013, and the Finance Ministry in December issued a strongly-worded notice likening crytocurrencies to Ponzi schemes and emphasised that buyers and investors were risking their money by investing in these products. This culminated in Finance Minister Arun Jaitley’s Budget speech on February 1, when he again reiterated the government’s position that cryptocurrencies were not legal tender and the government would look to curb any illegal transactions and financing using these digital currencies.
Legal or not?
While several commentators took this to mean that the government had declared cryptocurrencies illegal, industry players in contrast took a lot of heart from Mr. Jaitley’s statement, saying that instead of suggesting a ban, the government looked like it was considering regulation of the industry.
“When Mr. Jaitley said it was not legal tender, this is the stand the RBI has always maintained,” said Rahul Raj, co-founder and CEO, Koinex, one of India’s rapidly growing digital assets exchanges.
“Even foreign currencies in the country are commodities and not legal tender. He also mentioned that they are looking to curb the illicit financial of illegal activities. If they are talking about illicit use, it seems to suggest a regulatory environment rather than destroying the entire industry.”
In one of the Finance Minister’s media interviews, Mr. Raj added, “it came out very clearly that he meant regulation. “In a separate panel discussion, Economic Affairs Secretary Subhash Chandra Garg said that they were looking at a regulatory framework before the end of the financial year, and said the government was not comfortable with the words ‘coin’ or ‘currency’ because these are not legal tender, and so instead wanted to call them ‘cryptoassets’.”
Likewise, the industry body representing most of the blockchain and crytocurrency companies in India agrees with this assessment.
“There is a lot of negativity... arising out of repeated caution by the government and RBI that people are investing in cryptocurrencies at their own risk, which we agree with, and second, that it’s not legal tender, and third, some bank or the other says that you cannot use credit or debit cards to purchase cryptocurrencies,” Ajit Khurana, head of the Blockchain and Cryptocurrency Committee of the Internet & Mobile Association of India said. “But none of this goes to the existence or legality of cryptocurrencies.”
Earlier this month, Citibank banned the use of its credit and debit cards for the purchase of cryptocurrencies in India “given concerns, both globally and locally, including from the Reserve Bank of India, cautioning members of the public regarding the potential economic, financial, operational, legal, customer protection, and security-related risks” associated with dealing in them.
The central bank’s view, however, doesn’t seem as cut-and-dry as made out to be. On February 8, the RBI came out with a report on the fintech sector, in which it dedicated a section to digital currencies (DCs). It went into the modalities of such currencies and also their future potential, an indication that the RBI was not totally closed to the applications of digital currencies.
“The implications of DCs for financial firms, markets and system will depend on the extent of their acceptability among users,” the report said. “If use of DCs were to become widespread, it would likely have material implications for the business models of financial institutions. DCs could potentially lead to a disintermediation of some existing payment services infrastructure.”
Some cyrptocurrency players are also of the opinion that if the government wished to act decisively against cryptocurrencies, it would have already done so.
“If the government had to completely ban these cryptocurrencies, then they would have do so already,” Ashish Agarwal, founder of Bitsachs said. “I think they want to understand whether calling it illegal would result in serious harm, or whether simply declaring it illegal will stop the system or force people into buying these digital currencies using cash.”
The Income Tax Department this year sent one lakh notices to people who invested in cryptocurrencies and whose investments didn’t match their income profile.
This too was widely seen as an anti-cryptocurrency move, but industry players downplayed its significance saying the number of notices sent was too small and that they didn’t have much weight given that the current financial year is yet to end.
“The Income Tax Department came to all players and said: ‘give us the records [of investors]’,” Mr. Khurana said.
“Now, of the number of records that were given to them, the proportion of people to whom the notices went is a small fraction. While one lakh seems like a large number, it’s not as if we gave them one lakh [worth of] details and they sent notices to all of them. We gave them a much larger number. One lakh is a small percentage of that.”
“Suppose somebody has sold bitcoins after April 2017, not even one financial year has gone, so it couldn’t possibly have reached their income tax returns,” Mr. Khurana added. “The maximum that could have happened is that they could have reported any gains they made in their advance tax. The returns are only going to go in July 2018.”
“Suppose I am a low income earner who files a return of say, ₹2 lakh a year,” Mr. Agarwal added. “Now, suppose I have taken a loan and invested in bitcoin and have turned ₹3 lakh into ₹30 lakh. That, of course, will not match my past returns, right? Most of the investors made their gains in 2017-18, so the deadline for their declarations is yet to come.”
‘KYC compliant’
Another argument being made is that the reason the I-T department found it so easy to track down investors in cryptocurrencies was because the exchanges adhered to the same KYC rules as those followed by banks.
“From our perspective, we do the complete KYC requirements that are the same for most banks, which is PAN card, Aadhaar number, bank account details; every single payment that comes to us has to come through your own bank account,” Nischint Sanghvi, head of exchange at Zebpay said. “You cannot trade in your name and have somebody else send the funds.”
“Every single transaction can be traced,” Mr. Sanghvi added. “For certain high-end users trading above a certain value, we even ask for income tax documents, a CA certificate, and net-worth documents.
“Today, when somebody buys a car or jewellery, even that can be declared or, need not be. All the car company can ensure is that the person is paying through the right channels, the car is in their name, and the like.”
