Cryptocurrencies in India: A New Dawn
Devansh Dixit
Section E
A3211119321
Satyarth Singh
Section E
A3211119313
Abstract:
Virtual currency or cryptocurrency has become a hot topic of discussion in
recent years. Its decentralized nature and the potential to revolutionize the
financial system has caught the attention of individuals and organizations
worldwide. India, like many other countries, is also exploring the possibilities of
cryptocurrency. Cryptocurrency is a form of digital or virtual currency that uses
cryptography for security and operates independently of a central bank. In
recent years, cryptocurrencies have gained popularity in India, with the
country's burgeoning tech sector and young population showing increasing
interest in digital assets.
This research paper focuses on the introduction, regulation, concerns,
advantages, and disadvantages of cryptocurrency in India.
Key Words: Virtual Currency, Cryptocurrency, Digital asset.
Introduction of cryptocurrency in India:
The concept of cryptocurrency was introduced in India in 2009 with the launch
of Bitcoin. However, it was not until 2017 that the Indian market witnessed a
sudden surge in the use of virtual currencies. The exponential growth in the use
of cryptocurrency led to the Reserve Bank of India (RBI) issuing multiple
warnings against the use of cryptocurrency due to concerns over money
laundering and security. India's first encounter with cryptocurrencies was in
2013 when the Reserve Bank of India (RBI) issued a warning against the use of
virtual currencies, stating that they had not been authorized for use by any
regulatory authority in India. However, the government's stance has since
softened, with the RBI acknowledging the potential of blockchain technology
and the need for a regulatory framework to govern digital currencies.
The year 2017 saw a significant increase in the popularity of cryptocurrencies in
India, with Bitcoin, the most popular digital asset, reaching an all-time high of
$20,000. The cryptocurrency market in India was also boosted by the
demonetization of high-value currency notes, which led to a surge in the
adoption of digital payment systems.1
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Cryptocurrency has attracted a lot of attention in India due to its potential to
solve some of the country's long-standing financial problems, such as fraud,
corruption, and the high costs of international money transfers. Additionally, the
lack of a formal financial system in rural areas has made cryptocurrency an
attractive option for many people in India.
Research Methodology
The research methodology includes the information about the Cryptocurrency in
India. The secondary data is used to draw the conclusion. The objective of the
research paper is to observe the emerging trends of digital currency in Indian
Financial Market. For the purpose of attainment of research objectives the data
is collected from secondary sources .
Regulation of virtual currency in India:
The Reserve Bank of India (RBI) first issued a warning against the use of
virtual currencies in 2013, stating that they had not been authorized for use by
any regulatory authority in India. In 2018, the RBI prohibited banks from
dealing with businesses that traded in virtual currencies, leading to several
cryptocurrency exchanges shutting down or moving their operations overseas.
In 2018, the RBI imposed a ban on virtual currency transactions, which sent
shockwaves through the cryptocurrency market in India. This ban was
challenged in the Supreme Court of India, which lifted the ban in March 2020.
This ruling opened the doors for the cryptocurrency market in India to grow and
develop.2
The government of India has formed an inter-ministerial committee to examine
the potential of virtual currencies and propose regulations for their use in India.
The committee's report, submitted in 2019, suggested that the government
should treat virtual currencies as digital assets and regulate them under the
existing financial laws of the country. However, in 2020, the Supreme Court of
India overturned the ban, stating that it was disproportionate and
unconstitutional. Since then, the RBI has taken a more nuanced approach to
virtual currencies, acknowledging their potential while also highlighting the
need for a regulatory framework to govern their use
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assets-under-money-laundering-act-2344279-2023-03-09
The Way Forward
India's cryptocurrency space will remain unregulated until a regulatory
framework is established. While the Supreme Court's ruling has boosted the
crypto market and start-ups are launching new products, there are concerns
about a possible government bill that could ban cryptocurrencies. Despite this,
crypto start-ups are optimistic about the future and are urging the government
not to impose a blanket ban. The use of blockchain as a development in
technology by India’s banks also gives them a ray of hope with regard to
regulating of cryptocurrencies. One of the country’s largest public sector banks,
along with 28 other commercial banks, is testing blockchain technology under
the name ‘BankChain’, for achieving an integrated corporate e-KYC (electronic
know your customer) platform, a vendor rating system and a blockchain-
powered register, which records hypothecation, lien, mortgages and pledges on
movable, immovable and tangible assets. India's banks are also exploring the
use of blockchain technology, which could aid in regulating cryptocurrencies.
Experts suggest that instead of a total ban, a risk-based framework should be
developed to address issues such as legal tender, security contracts, tax,
financial markets, and data storage and privacy. Such a framework could be
implemented in phases and would allow cryptocurrency to thrive in India in the
coming years.3
Suggestions for Reforms in Cryptocurrency Market
1. Comprehensive Regulatory Framework
The lack of a comprehensive regulatory framework is a significant challenge
facing the virtual currency industry in India. To promote the safe and secure use
of virtual currencies, the government needs to establish a regulatory framework
that addresses issues such as money laundering, fraud, and cybersecurity. The
framework should also define the legal status of virtual currencies and provide
clarity to investors and businesses operating in the industry.
2. Licensing and Registration
To ensure that only legitimate businesses operate in the virtual currency
industry, the government should establish a licensing and registration system.
This system should require businesses to meet certain standards and criteria,
such as having adequate cybersecurity measures in place and adhering to anti-
money laundering regulations.
3. Taxation
Virtual currencies are currently not subject to taxation in India, which is a
significant concern for the government. To promote the industry's growth while
also generating revenue for the government, virtual currency transactions should
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be subject to taxation. The government should work with industry stakeholders
to develop a taxation framework that is fair and transparent.
4. Education and Awareness
Low levels of awareness and education among the general public are a
significant challenge facing the virtual currency industry in India. To promote
the safe and secure use of virtual currencies, the government should launch
education and awareness campaigns that educate the public about the benefits
and risks of virtual currencies. These campaigns should also provide
information about the legal status of virtual currencies and how to safely invest
in them.
5. Access to Banking Services
The lack of access to banking services is a significant challenge facing the
virtual currency industry in India. The government should work with the RBI
and banks to ensure that virtual currency businesses have access to banking
services. This will not only promote the growth of the industry but also ensure
that legitimate businesses operate in the industry.
Concerns regarding cryptocurrency:
Cryptocurrency has faced significant criticism from regulators and
policymakers globally. In India, the major concerns include the lack of
regulatory framework, high volatility, potential for illegal activities, and the risk
of financial instability.
One of the major concerns with virtual currencies is the lack of regulation,
which creates a fertile ground for illegal activities. For example, the use of
cryptocurrency for money laundering, financing of terrorism, and other illicit
activities has been on the rise globally.
The high volatility of virtual currencies is also a major concern. The value of
cryptocurrencies can fluctuate rapidly, making them unsuitable for long-term
investments. Additionally, the lack of a central authority means that there is no
mechanism to stabilize the value of virtual currencies.
Another significant concern with virtual currencies is the potential for financial
instability. The lack of a central authority means that there is no one to monitor
or control the flow of funds, which can lead to financial instability in the long
term.
What Is The Cryptocurrency Tax In India?
One of the most perplexing issues in India is the taxation of cryptocurrencies.
At first, neither the Income Tax Act nor the Goods and Services Tax (GST) in
India had defined cryptocurrencies. The Finance Minister has unveiled a tax
structure for virtual or digital assets, including cryptocurrencies, in the Union
Budget 2022 result.
Investors in cryptocurrencies must include the computed earnings and losses in
their income reports.
Earnings from the transfer of digital assets, such as cryptocurrencies and NFTs,
will be subject to a 30% tax.
When reporting earnings from the transfer of virtual assets, only the acquisition
cost may be taken into account; no deductions are allowed.
1% of the tax that was taken out at source(TDS) if the purchaser's payment
exceeds the threshold level.
If cryptocurrency is given as a gift or transferred, the recipient must pay tax on
it. It is not possible to offset any losses from investing in virtual assets with
other sources of income.
In order to control the burgeoning cryptocurrency business in India, the
government proposed the Cryptocurrency Bill 2021 in the Lok Sabha. In recent
years, the industry has experienced a surge in investment, particularly during
the COVID period, both domestically and abroad4
Pros and Cons of cryptocurrency:
The advantages of cryptocurrency include decentralization, anonymity, and low
transaction fees. The decentralized nature of virtual currencies means that they
are not controlled by a central authority, which makes them immune to
government or corporate influence. Additionally, the anonymity provided by
virtual currencies makes them an attractive option for individuals who want to
keep their financial transactions private.
Pros of cryptocurrencies
1. Inflation protection:
Many currencies have seen a gradual loss in value due to inflation. Almost all
cryptocurrencies are introduced with a hard and fast amount at the time of their
inception. There are only 21 million Bitcoins that have been released
worldwide, according to the ASCII computer file, which lists the quantity of
each coin. As a result, if demand rises, its value will rise as well, helping to
keep the market stable and, in the long run, preventing inflation.
2. Self-managed and governed
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Any currency's governance and upkeep are important factors in its development.
Developers/miners store cryptocurrency transactions on their hardware in
exchange for a charge known as a transaction fee.
Virtual currencies also have low transaction fees, which is a significant
advantage for individuals who make frequent international money transfers.
Traditional banking systems charge high fees for international money transfers,
which can be a significant financial burden for many people.
3. Decentralized
The fact that bitcoins are primarily decentralised is a huge advantage. Many
cryptocurrencies are controlled by the people who create them, by those who
own a large portion of them, or by businesses that create them before they are
made available on the market. Unlike to fiat currencies, which are controlled by
the government, cryptocurrencies are kept stable and secure by the
decentralisation, which helps keep the currency monopoly free and in check. As
a result, no organisation can decide the flow and, consequently, the value of the
coin.
4. A transactional method that is affordable
Sending money across borders is one of the most common uses of
cryptocurrencies. With the use of cryptocurrencies, a user's transaction fees can
be negligibly low or even nothing.
However, the disadvantages of virtual currencies include the lack of legal
recognition, high volatility, and the potential for fraudulent activities. The lack
of legal recognition means that virtual currencies are not protected under the
existing financial laws of the country. This lack of legal recognition also makes
it difficult for individuals to seek legal recourse.
5. Currency exchanges finish smoothly:
Cryptocurrency can be bought using many currencies rather like the US dollar,
European euro, British unit of measurement, the Indian rupee, or Japanese yen.
Varied cryptocurrency wallets and exchanges help convert one currency into
another by trading in cryptocurrency, across different wallets, and by paying
minimal transaction fees.
Cons of cryptocurrencies
1. Unlawful business dealings
As cryptocurrency transactions are highly private and secure, it is challenging
for the government to track down any user by their wallet address or keep an
eye on their data. Bitcoin has historically been used to exchange money during
many unlawful transactions, such as purchasing narcotics on the dark web.
Some people have also utilised it to convert their illegally obtained money
through a legitimate middleman to conceal the source.
2. Data Loss Risk:
The designers sought to create authentication processes that were impenetrable,
virtually undetectable ASCII documents, and robust hacking defences.
Positioning money in cryptocurrency rather than actual cash or bank vaults
would make it safer. But if any user loses the private key to their wallet, there is
no getting it back. The wallet will remain locked away along with the number of
coins inside it. It might result in the loss of the user.
3. Power lies in few hands:
Although cryptocurrencies are known for their feature of being decentralized,
the flow and amount of some currencies within the market are still controlled by
their creators and some organizations. These holders can manipulate the coin for
enormous swings in its price. Even hugely traded coins are at risk of these
manipulations like Bitcoin, whose value doubled several times in 2017.
4. Buying NFTs with other tokens:
Some cryptocurrencies can only be traded in one or some fiat currencies. It
forces the user to convert these currencies into one all told the most currencies,
like Bitcoin or Ethereum first and then through other exchanges, to their desired
currency. It can apply to just some cryptocurrencies. By doing this, the extra
transaction fees are added within the method, costing unnecessary money.
5. No refund or cancellation:
If there is a dispute between concerned parties, or if someone mistakenly sends
funds to a wrong wallet address, the coin cannot be retrieved by the sender. It
might be utilized by many folks to cheat others out of their money. Since there
are no refunds, one can easily be created for a transaction whose product or
services they never received.5
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Conclusion
In conclusion, the rise and regulation of cryptocurrency in India is a complex
and rapidly evolving issue. While the Supreme Court's ruling in 2020 lifted the
Reserve Bank of India's ban on cryptocurrency trading, the lack of a clear
regulatory framework has left the industry in a state of uncertainty.
Despite the concerns over a potential government ban on cryptocurrencies, the
crypto market in India has shown remarkable resilience and growth. Many
cryptocurrency start-ups are expanding and launching new products, while
India's banks are exploring the use of blockchain technology to improve their
services.
However, the lack of regulation has also made the cryptocurrency market in
India vulnerable to fraud and abuse. Several high-profile cases of
cryptocurrency scams have been reported in recent years, highlighting the need
for greater oversight and consumer protection.
To address these challenges, experts have suggested the development of a risk-
based regulatory framework for cryptocurrencies in India. Such a framework
would address issues such as legal tender, security contracts, tax, financial
markets, data storage and privacy. By taking a risk-based approach, the
government could focus on harnessing the benefits of cryptocurrencies while
mitigating the risks.
The implementation of such a framework, however, would not be without its
challenges. India's regulatory landscape is notoriously complex, and any new
regulations would need to navigate a web of competing interests and priorities.
Furthermore, the rapid pace of technological change in the cryptocurrency
industry means that any regulatory framework would need to be flexible and
adaptable.
Despite these challenges, the future of cryptocurrency in India looks bright. The
potential benefits of cryptocurrencies - such as faster, cheaper and more secure
transactions - are too significant to be ignored. Furthermore, the growth of
India's digital economy, coupled with the increasing popularity of
cryptocurrencies worldwide, means that the demand for crypto services is likely
to increase in the coming years.
