List of Contents
- What are some major points related to government decisions?
- What has been the approach of the Indian government on virtual currencies?
- What are the challenges associated with virtual currencies?
- Why should the Indian government be proactive in dealing with virtual currencies?
- What should be the approach of the Indian government towards virtual currencies?
Source– The post is based on the article “Belated, but essential” published in “The Hindu” and Crypto under PMLA: New rules of the game” published in “The Indian Express” and “GoI Is Less Cryptic” published in “The Times of India” on 11th March 2023.
Syllabus: GS3- Indian economy
Relevance– Issues related to financial and banking system
News– The government has mandated that a host of trading activities in crypto assets will now come under the ambit of the Prevention of Money Laundering Act.
Trading between cryptocurrencies and fiat currencies or among cryptocurrencies and other such services can be investigated by agencies such as the Enforcement Directorate (ED) and the Income Tax department.
It puts the onus of ascertaining the provenance of all activity in such assets upon individuals and businesses participating in or facilitating these transactions.
What has been the approach of the Indian government on virtual currencies?
The government has decided to not accept cryptocurrencies as “currencies”. It treats them as virtual digital assets.
India’s regulatory framework is consistently evolving for crypto assets.
Prior to Parliament’s winter session of 2021, GoI indicated that a bill to regulate crypto assets would be tabled. However, a bill was never introduced.
In April 2022, the government introduced a 30% income tax on gains made from cryptocurrencies.
In July 2022, the government brought in rules regarding 1% tax deducted at source on cryptocurrency.
GoI also acknowledges the limitation of having a standalone domestic regulation for virtual assets. In February, GoI informed Parliament that crypto assets are not confined by national boundaries.
Regulation will be effective only if there’s international collaboration on evolving a common regulatory framework. Therefore, India is utilising the G20 platform to catalyse a common framework.
RBI has consistently advocated for a ban on virtual currencies. It had asked financial intermediaries it regulates to follow KYC norms and other relevant standards for remittances following transactions in crypto assets.
What are the challenges associated with virtual currencies?
They are designed to bypass the financial system and existing regulation. Their anonymous character makes them effective. But these characteristics also throw up several risks for any economy.
Due to absence of regulation, they can evade minimum prudential norms such as Know-Your-Customer regimes, Anti-Money Laundering and Combating the Financing of Terrorism (CFT) rules etc.
There is the question of monetary sovereignty. These private currencies are often pegged to the US dollar. They can replace the Indian rupee and lead to greater “dollarisation” of the Indian economy even as the monetary and fiscal authorities lose control.
FATF has been continuously flagging the potential that virtual digital assets have for criminal misuse due to their speed and anonymity.
A few countries have moved to regulate virtual assets, and some others have banned them outright, while a majority have not taken any action. It has created a global system with loopholes for criminals and terrorists.
Why should the Indian government be proactive in dealing with virtual currencies?
Volume of trade in unregulated virtual assets has grown significantly in recent years.
The Enforcement Directorate is investigating several cases related to cryptocurrency frauds wherein a few crypto exchanges had been found involved in money laundering. ₹936 crore had been attached or frozen as on January 31 for linkages with proceeds of crime.
A July 2021 online report by BrokerChooser.com had estimated India as being the country with the highest number of ‘crypto owners’, at 10.07 crore. It was more than threefold the number of owners of crypto assets in the second ranked U.S.
What should be the approach of the Indian government towards virtual currencies?
The government must at the earliest decide on a full-time regulator for this sector and not leave entities trading in cryptocurrencies at the mercy of investigative agencies alone.