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    Check crypto trade, ban won’t help

    Synopsis

    It would be a pity to slam the door on innovation & technology spinoffs.

    Crypto-currency-
    Use cases for cryptos in India should be considered to formulate a cohesive policy.
    By Anirudh Gotety

    India’s cryptocurrency industry is once again in the throes of uncertainty. The Supreme Court has asked the RBI to respond to industry players in their petition filed against the banking ban on cryptocurrency. Indian regulators, particularly RBI, have always been a distant observer to the crypto frenzy. None of the bitcoin millionaires of 2017 were Indians and RBI had been unsure how to go about regulating it. First, it warned, and later, in April 2018, virtually banned cryptos by prohibiting banks from servicing any crypto transactions. Fledgling local crypto exchanges like Zebpay shut shop.

    Now the government has rung the death knell for crypto trade. The Department of Economic Affairs has proposed a draft bill called the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’. Not only does this intend to ban the use of all private cryptos but also suggests a blockchain-based central bank digital currency.

    Instead of analysing the benefits and risks of cryptos to adopt a meaningful regulation, Indian watchdogs reacted hastily by imposing a ban. A ban — which simply paves the way for illicit trade — should be the last resort when regulation can’t be the answer. Prohibition and betting are testimony to this truth.

    Cryptos such as Bitcoin or Ethereum are based on the concept of decentralised ledger technology or blockchain. Every transaction is recorded on a decentralised ledger of which every user has a copy. This eliminates the need for a central authority or middlemen. Advocates of cryptos point out that it not only lowers transaction cost by eliminating banks but shields currency from possible political risks.

    Separating commodities and currencies from other fiat currencies like the US Dollar (fuelling the US hegemony) is something India should push for. Cryptos encourage greater financial inclusion as crypto wallets replace bank accounts. For investors, it’s an avenue to diversify risk.

    Make no mistake. There are risks associated with trading in cryptos. The reason that drove the government towards a ban was the use of cryptos in funding terrorism, drugrunning and money laundering.

    Nonetheless, India’s interests would be better served with an efficient and robust regulatory mechanism. The ban, as it stands now, can be circumvented through crypto barter and even cash dealings. Instead, sterner trading rules and taxing the trades or transactions may help.

    It would add to the government’s coffers if cryptos are (or were) considered goods under the GST — enabling a retroactive application of GST. Total revenue of the top seven Indian crypto exchanges were reportedly ₹40,000 crore and one has to figure out whether crypto exchanges would be required to pay GST (of 12% or 18%) on their entire revenue or only on the margins they charge from consumers. Then, a slew of crypto services could come under the tax net — the commission crypto miners receive, the actual sale of cryptos from one user to another, the margins exchanges charge, etc. Besides crypto sale, even barters — say Ethereum for Bitcoin — would attract tax. Local transactions would attract CGST, SGST and IGST while cross-border trades would fetch IGST. Lastly, the earnings of exchanges, users, and others could be taxed under the I-T Act.

    Framing the fair rules of the game should begin with strict know-your-customer and suspicious transaction-reporting norms; second, the moneylaundering laws around cryptos should be unambiguous; third, the regulations need to address accountability, transparency and a degree of uniformity around crypto exchanges. This could be done by setting up licensing to tackle fraudulent entities which engage in multi-level marketing and peddle Ponzi schemes. This should be backed by a strong consumer protection and grievance redressal mechanism coupled with spreading awareness about the risks and benefits.

    Use cases for cryptos in India should be considered to formulate a cohesive policy. In Japan, the use of cryptos as currency has been approved. Germany and the US treat them as an asset class. Venezuela (though not the best example) had introduced a crypto backed by the country's oil supply as a way to circumvent international sanctions. In India, cryptos have been used mainly for arbitrage. So regulations must be put in place to allay fears that culminate in a ban. It would be a pity to shut the doors to spinoffs from innovation and technology.

    (The writer is an associate at L&L Partners Law Offices. Views are personal)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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