While there are several items on the legislative agenda for this winter session of Parliament, the report of a proposed cryptocurrency regulation for India has grabbed public attention. While early news indicates that the government is planning to ban private cryptocurrencies altogether, recent reports suggest that we can expect a better balanced regulatory regime.
In a previous column, I wrote about the futility of banning bitcoin trading, arguing that a ban is rarely an effective solution. I pointed out that, at the end of the day, “the only people who comply with the terms of the ban are those who always intend to use the service for lawful purposes. Everyone else can continue their already nefarious activities.” Take you deep.”
That said, there are other complications that the proposed cryptocurrency regulation will have to address. First, since anonymity is a widely practiced feature of cryptocurrencies and given that most of them are relatively freely exchangeable with fiat currency, there is a concern that they could be used for money laundering. Many countries have addressed this by requiring cryptocurrency exchanges—platforms that convert crypto into real money and vice versa—to perform customer verification checks and require them to maintain transaction records for a specified period of time. In some jurisdictions, regulators require exchanges to employ trained personnel to detect suspicious transactions.
Another concern is how crypto transactions are taxed. While capital appreciation from crypto sales is clearly subject to capital gains, it is somewhat difficult to determine how services paid for using cryptocurrencies should be taxed under indirect tax regimes such as GST. One could argue that any service, whether paid in fiat or crypto currency, should be subject to GST, but what is not immediately clear is how the tax on such an unstable payment mechanism is calculated. should be done. One possible approach could be to base the actual tax payable on the fair market value of the cryptocurrency on the date of payment or receipt.
And then there is the question of how to specifically tax the income generated through cryptocurrency technologies, such as mining operations (in the context of proof-of-work based cryptocurrencies like bitcoin). Given that crypto mining income has no real-world equivalent, it may be necessary to amend the tax code so that income earned from this activity is treated as a new category of income.
We also have to decide how we regulate crypto exchanges. Given that they are central to the regulation of this sector, we may require them to be registered in India to bring them explicitly within the ambit of Indian regulation. Some countries also impose licensing obligations on these exchange platforms, so that their continued operations are subject to compliance with specified conditions.
And then, finally, there is the question of regulating other crypto assets (new types of crypto tokens, initial coin offerings, and so on), which have all the security features but which operate on the blockchain. Most countries have brought crypto assets under securities regulation, which requires issuers to comply with specific disclosure requirements at the time of issuance, as well as insider trading and market manipulation regulations when trading in these crypto assets. Is.
All of this suggests that instead of introducing a new cryptocurrency law, as is currently being proposed, the government should amend existing anti-money laundering, taxation and securities regulations to ensure that they do not provide additional security. Let’s cover the cryptocurrencies and assets discussed above. This will ensure that our existing regulatory framework, along with the relevant enforcement mechanisms that we have already established, is expanded to regulate crypto as another class of asset.
Having said that, this approach excludes all transactions that take place entirely in the cryptocurrency realm, which never enter the ‘real world’ as some goods and services can be bought directly using cryptocurrencies. can go. Currently, most governments have chosen to ignore this category of transactions, relying on the fact that these ‘currencies’ are still not widely accepted, and as a result, most people who hold their If you want to spend cryptocurrencies in the U.S., first convert them into regular fiat currency.
As true as this is so far, it is bound to change in a short time. Mainstream businesses have already started accepting cryptocurrencies as payment for goods and services, and over time, I can see that we can directly buy everything we need using cryptocurrencies. Similarly, a growing number of entrepreneurs are opting to raise funds by issuing crypto tokens and voluntarily depositing their organizations into a decentralized blockchain-based governance system. This has given rise to a real explosion of decentralized autonomous organizations.
All of these developments will signal a more fundamental social shift towards widespread use of crypto. But it isn’t until it actually happens that we should think about implementing bespoke cryptocurrency regulation.
Rahul Mathan is a participant in Trilegal and also has a podcast called Ex Machina. His twitter handle @matthan . Is
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