The Cryptocurrency Scenario
– After the Budget
Where is crypto headed?
Dr. RAJAN KATOCH
A great deal is suddenly happening in policy towards cryptocurrency (crypto for short). For the Union Budget for 2022–23, Finance Minister Nirmala Sitharaman announced that (a) 30% tax would be levied on profits from “digital virtual assets” (a category that includes crypto), (b) tax would also be deducted at source (TDS) at 1%, and © a new central bank digital currency (CBDC) would be launched.
Till then, news about the crypto world was not really mainstream discourse. Suddenly, it is the flavour of the day. There has been extensive coverage in both visual and print media. Now the dust has settled somewhat. It’s a good time to look at where crypto is headed.
Just like the prices of crypto coins, policy on crypto has been swinging from one extreme to another. To recap, just four years back, the Reserve Bank of India (RBI) had effectively banned crypto, forbidding financial institutions in having anything to do with it. The ban was lifted by an order of the Supreme Court in 2020. The Government then wanted to ban private cryptocurrencies altogether, through a Bill that even provided for a stiff ten-year jail term for dealing in crypto. This Bill was never tabled. And now a tax has been imposed, implying some sort of recognition. That’s quite a roller coaster ride!
Does taxing crypto legitimize its status? Well, not really. The Finance Minister in a post-Budget interview stated that private cryptocurrencies are not currencies but assets. Finance Secretary Somanathan on the other hand said that crypto is akin to gambling. The RBI remains resolutely opposed to crypto and favours an outright ban, with Governor Shaktikanta Das warning afresh that it’s a threat to financial stability and has no underlying value, not even that of a tulip! Deputy Governor Rabi Shankar opines that crypto is worse than a Ponzi scheme. Officials state that taxing the asset does not mean it is legal.
So we have this goose that lays golden eggs — a goose that is not legal, but the eggs it lays are taxable!
Has all this regulatory uncertainty put off investors? It doesn’t seem so. Investors in India are flocking to crypto in droves. When I had penned a non-technical piece on crypto in these columns (The Crypto Conundrum — 29 June 2021 page 8 http://www.risingkashmir.com/epaper/) six months back, there were an estimated one crore Indian investors in crypto coins. In just six months, the number is estimated to have gone up to about 2.5 crores now. The amount invested is said to be of the order of Rs. 40,000 crores.
Many start-ups have established crypto exchanges that have made it super easy to put in and take out money in crypto, in amounts as low as Rs. 100! The names of the bigger ones (such as Coin DCX, Coinswitch Kuber, Unocoin, Wazir X) have almost become household words. These exchanges are wholly unregulated. Yet, they have succeeded in acquiring the trust of ordinary investors and attracted financing from venture capital. Coin DCX and Coinswitch Kuber have already become unicorns, that is, they are valued at more than US $ 1 billion!
A digital rupee is now also to be launched. Though it is not clear how the proposed CBDC would be more useful to the common man than the digital payments system already operating. Today, with United Payments Interface (UPI) and mobile wallets, cash is already digital. With just a wave of the mobile (to scan a QR code) and the entering of a passcode, I can digitally pay an amount as low as ten rupees to a street vendor. Money is seamlessly picked up from my bank account and put in the vendor’s bank account. It will be a tough act to beat for the new digital rupee!
Crypto coins are highly risky, volatile and prone to scams. Nevertheless, investors are prepared to take their chances for the possibility of getting rich quick. Regulation is undoubtedly needed.
But investing/speculating is not all there is to it. What the technically knowledgeable (as opposed to the financial gurus) find exciting are the possibilities in the underlying blockchain technology. New decentralized applications based on this technology are being developed in areas like smart contracts, digital art, gaming etc. It is being said that this is the beginning of a new, decentralized phase of the Internet.
Recall that in the early stages of the Internet in the 1980s, the net was just seen as a store of information and something that allowed instant communication through email. It was impossible then to think of all the user-friendly applications that since emerged. For example, the entire world of social media, or the tech start-ups that today provide all kinds of customized services at the click of a button. Similarly, in the next phase (sometimes termed as Web3.0) driven by blockchain technology, many more applications may become possible in areas that cannot be imagined today.
Already, domestic start-ups are emerging in this space. For example, Polygon provides a platform for developers to build decentralized apps on blockchain more efficiently. Not going into the technical details, it is remarkable that in just five years since its launch, the Matic crypto coin floated by it has received support from established venture capital funds like Sequioa Capital and SoftBank, and reached a market cap of over US $ 10 billion. Who are the founders of Polygon? Homegrown engineering graduates from Indian institutions and based in India. Do I see potential for Atma Nirbharta here?
To sum up, after the budget, legal or not legal, crypto will continue to flourish. People are going to continue to invest and speculate. People are people. Some will win. Many will lose. Simultaneously, new global opportunities in developing blockchain-based applications will arise.
The coming regulatory regime will need to take these rapidly emerging trends into account.
Because, like it or not, this is the future. And for our budding entrepreneurs, the sky is the limit.
(First published in Rising Kashmir, 22 February 2022)