In the Union Budget speech, Finance Minister Nirmala Sitharaman announced a 30% flat tax rate levied on any gains made from the transfer of virtual assets including cryptocurrencies and Non-Fungible Tokens (NFTs).
But first some background. Cryptocurrency (crypto) consists of a digital denomination designed to work as a medium of exchange through a distributed computer network (a blockchain) that is not reliant on any central authority such as a government or a bank for its upholding and maintenance. This announcement by the Finance Minister now leads to the assumption that crypto is legal in India.
Sign of optimism
This prescient move amounts to effectively being a de facto affirmation of the role that cryptocurrency and related technologies could play in India’s financial-cum-economic system. Foreseeable are changes that would, down the road, legitimise and formally legalise the activities of crypto start-ups and enable them to access the necessary support system which might not have been available previously. Such a statement also heralds reforms aimed at removing ambiguity among the relevant stakeholders.
It is high time that crypto made a splash in the country, but this splash must, as with all innovation, be carefully managed to prevent rushed creative destruction and systemic liabilities. While critics are right in observing that the 30% flat tax rate is a harsh rate, this is a premium and price well-worth paying in exchange for what is effectively a ruling-out of prospects for a total ban on crypto by the central government.
Additionally, while the high tax rate would inevitably hamper the willingness of investors to convert cryptocurrencies into the national fiat, this may, in turn, open up more doors for technologically savvy and innovation-minded investors. The extremely high tax rate and the fact that the losses cannot be offset would invariably propel investors to turn to alternative means of storing and undertaking transactions in cryptocurrencies, without foregoing the significant losses involved as they “switch” back into the rupee. An inadvertent upside of this, then, is the prospective conversion and reallocation of crypto-funds from one form to another.
Will aid innovation
Such transformations would involve DeFi (Decentralised Finance) activities such as staking, lending, and providing liquidity, among others. DeFi (or “decentralized finance”) is “an umbrella term for financial services on public blockchains. With DeFi, one can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it is faster and does not require paperwork or a third party. As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, and not routed through a centralised system), pseudonymous, and open to all”. The processes highlighted above would drive innovation in the field of Indian DeFi; they would go a long way in assisting the building up of our crypto-financial ecosystem in the long run.
More generally, the adoption of crypto currencies and virtual assets would enable quicker and cheaper transactions compared to banks and new forms of wealth creation without centralised intermediaries — which are subject to accidental or intentional capture by vested interests. While crypto is yet to become completely mainstream, one can easily see that we are in the transition phase, as investors and innovators new to the crypto ecosystem dabble their feet to test the waters.
Potential concerns
The community of small and medium-sized enterprises (SMEs) and lower-end high net-worth individuals — the very community that has the most to gain from decentralised finance — is going to find it most difficult to access the ecosystem given the substantial barriers posed by the tax rates. Unless radical reforms are undertaken to liberalise the system — through positive incentives and infrastructural installation — it is unlikely that the community we speak of here is likely to reap the gains from the system (in light of the burdens they would confront). Participation would remain unlikely for at least a few more years to come.
Additionally, when it comes to India’s crypto policy at large, there is a fundamental lack of clarity in aspects other than taxation. While the finer details can only be seen once the Cryptocurrency Bill is passed, there appears to be a push to treat crypto as purely an asset class than a currency. The consolation offered by the Government in the form of the Reserve Bank of India’s CBDC, or Central Bank Digital Currency, will definitely help in pushing for the adoption of digital currencies, but, equally, defeats the fundamental purpose of cryptocurrency, which is decentralisation. As a flourishing and dynamic democracy, India deserves an empowered and mobilised middle class of consumers, investors, and crypto-minded citizens who can imbue their civic engagement and economic activities with cryptocurrency in contributing toward a brighter and better political future for all in India.
Reforms are an answer
The solution rests with systemic, real reforms. The obvious candidate for such reforms would be to reduce tax rates in the future, though this must be weighed against considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency. While these are by no means short-term risks, they could pose medium- to longer-term threats, though arguably, the solution here lies not with taxing crypto altogether, but in introducing more rigorous regulations where appropriate without which crypto has the potential to become a source of illegitimate political funding or black money.
Tapping other insights
The second reform constitutes the incorporation of insights from seasoned partners from international communities; the key should rest with engaging these individuals for their insights and advice on the best practices associated with cryptocurrency policymaking. How can we push forward transformations to financial structures without rocking the socio-political boat? How can we navigate the potential security quagmires and challenges presented by crypto? How can we ensure that our infrastructure remains intact and capable of addressing the needs and the demands connected with crypto consumers? These are questions that only a synthesis of domestic and foreign talents (through organic dialogue and collaboration) could answer.
Systemic reforms are by no means easy, but they are critical as an amplifier of the successes that India has already accrued in the field, and as an accelerator of India’s advancement in the sphere of cryptofinance and blockchain social policymaking. Here is to a better and brighter future for all the parties involved.
Salem Dharanidharan is an executive coordinator at the Dravidian Professionals Forum and co-founder of the Oxford Policy Advisory Group. Brian Wong, a Rhodes Scholar and D.Phil in Politics candidate at Balliol College, Oxford, is also a co-founder of the Oxford Policy Advisory Group. Bethanavel Kuppusamy is a technology entrepreneur building Fantico, a celebrity NFT platform
