Cryptocurrency News: India Can Achieve Responsible Cryptocurrency Development With Self-Regulation

The rise of the cryptocurrency sector has been a dynamic and unpredictable journey over the past few years. While cryptocurrencies are not yet a major part of the global financial system, that too is starting to change and their presence is now indisputable. However, the borderless nature of cryptocurrencies poses various risks to the global economy due to its unique technological and economic characteristics. Effective regulation in the area of ​​investor protection is essential to building trust in markets like India, which is at the forefront of global cryptocurrency adoption. Similar to other G20 nations, India must balance the need to protect investors with the desire to foster innovation in this rapidly evolving sector.

The Indian government has had to grapple with the complexities of regulating cryptocurrencies, or Virtual Digital Assets (VDA), as they are called in India. Initially considering an outright ban, India has since recognized the global nature of the cryptocurrency market and the need for a coordinated international response. During its G20 PresidencyIndia has taken a leadership role in promoting a collaborative global regulatory framework to address the cross-jurisdictional challenges posed by VDAs.

A recent article from the Indian Council for Research on International Economic Relations (ICRIER) on regulatory choices for crypto-assets for consumer protection highlights the need for the Indian government to leverage international experience and work towards harmonized global regulation for this asset class. While close collaboration between sectors is essential for the evolution of the market, it cannot replace strong government oversight.

Key Developments in India’s VDA Regulatory Framework

• Taxation of ATVsIndia has introduced income tax laws to recognize earnings from cryptocurrency transactions, thus bringing them under the purview of the Income Tax Act.

• Anti-money laundering measuresThe Prevention of Money Laundering Act (PMLA) now covers VDA transactions, requiring VDA service providers and wallets to conduct customer due diligence and register with the Financial Intelligence Unit, India (FIU-IND).

• Regulatory SandboxThe Reserve Bank of India’s Enabling Framework for Regulatory Sandbox allows testing of blockchain technologies, although it currently excludes cryptocurrencies and related services.

Despite this progress, a comprehensive regulatory framework for cryptocurrencies remains elusive. However, the government has indicated a preference for a globally aligned approach. This was highlighted in their presidential note to the G20 for the IMF-FSB position paper, recommending:

• Establishing a global coordination framework for cryptocurrency regulation.
• Developing standards for stablecoins and unsupported cryptocurrencies.
• Improving cross-border payments and addressing risks to financial stability.

The way forward: self-regulation and global cooperation

To realize the full potential of cryptocurrencies and mitigate risks, India must actively work with its G20 partners to implement these recommendations. At the national level, the government should consider allowing self-regulation among responsible and compliant Indian players, as this could foster innovation while ensuring investor protection. As a first step towards self-regulation, the leading Web3 and VDA industry body, the Bharat Web3 Association (BWA), of which CoinSwitch is a founding member, has issued two sets of voluntary guidelines, one on consumer protection and another on token listing. More will follow. Additionally, it will be crucial to reconsider the tax treatment of VDAs in the July 2024 Union Budget:

• Reduce TDS rate on VDAs: Reduce TDS rate on transfer of VDA from 1% to 0.01% under Section 194S to bring most VDA transactions under tax control mechanism, improve tax compliance and prevent capital flight.
• Allow for loss compensation: Enable loss offsetting in a similar manner to other sectors to encourage responsible business practices and reduce the risk of tax evasion.
• Review the 30% flat rate: Review the 30% flat rate applicable to VDA transfer income to ensure parity with other technology-based sectors.

As the global regulatory landscape for cryptocurrencies evolves, India’s leadership in this space will be crucial. By striking the right balance between regulation and innovation, India can position itself as a hub for responsible cryptocurrency development and help create a more stable and inclusive financial system.

(The article is attributed to R Venkatesh, Senior Vice President – Public Policy, CoinSwitch)

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(Disclaimer: The opinions expressed in this column are those of the author. The facts and opinions expressed here do not reflect the opinions of www.economictimes.com)

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