Introduction
Bitcoin and Cryptocurrency is the buzzword among investors, technology enthusiast and everyone in general. The Uncertainty around regulations and legality of cryptocurrency transactions has meant that the industry is yet to realise its potential. Therefore, a clear set of regulations are required to determine the way in which cryptocurrency, its exchanges and assets will operate.
What is Cryptocurrency?
According to Merriam-webster Dictionary Cryptocurrency means “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions”
Legislative System
India’s legislative system is generally reactive in nature towards technology. We have always been late to catch-up in terms of regulating latest technological developments. This has always meant that there is a lot of confusion among Indian citizens concerning the regulatory aspects of new technologies and has led to slow adoption and penetration of Technologies into our lives. The Tech Industry is growing rapidly and India must design its own set of checks and balances for the industry. In this process a lot can be learnt from the best practices followed around the world. It has been seen in many countries including in India that whenever the Government is in the process of making guidelines, the tech companies pre-empt the actions of the government and try to bring in a code of self -regulations. These code of self-regulations sometimes also bring out innovative ways to regulate technologies but also try to evade law enforcement agencies and government control.
Legal Position
In March 2020, the Supreme Court through Judgement ruled in favour of crypto assets and prepared the door for the relaxation of previous prohibitions, claiming a lack of evidence to justify the prohibition. The government has also introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which aims to make it easier for India to establish its own official digital currency and experiment with other crypto assets. The recent RBI circular clarifying it position is also a welcome move. Companies dealing with digital currencies must additionally declare profit or loss on crypto transactions, the amount of crypto assets owned, and deposits kept, according to the amendments made to Schedule III of the Companies Act.
Policy Suggestions and Way Ahead
Although the Government has taken positive steps towards embracing Cryptocurrency, there is still no clear framework to protect the rights of citizens investing in cryptocurrency. India can benefit by tapping into the potential of cryptocurrency and blockchain like other global superpowers which have already regulated them. So before discussing the factors that need to be considered in formulation of a crypto regulation, there needs to be a change in the way we approach and look at cryptocurrency. Traditionally we have been looking at crypto as a form of currency which is causing great problems as it is in the form of a decentralized ledger and goes against the very concept of regulation by a centralized bank. But in regulating crypto we need to consider a different approach and consider Crypto as an asset class. Taking this approach will help us to negate the traditional dispute of regulating it using a central bank. This approach is similar to that of United States when it in 2014 regulated crypto by considering or treating it as “property”. This also solves a major problem regarding taxation of crypto-assets as it will qualify for capital gains just like stocks and bonds.
Now that the approach is clear let’s discuss the factors that should be considered will framing a legislation to govern cryptocurrency. The regulatory policy should clearly define cryptocurrency so that there is no ambiguity. As discussed earlier it should define cryptocurrencies as an asset class and this approach will help to larger extend in mitigating the issues.
There also to be a clear system to register crypto exchanges that deal with these crypto-assets. A set of minimum requirements to qualify as a crypto exchange should be laid down. These Crypto-exchanges should be made to compulsorily display their registration status on their websites and Apps.
Some experts also suggest establishing a strong regulatory body that looks after these crypto exchanges and largely overlooks the buying and selling of crypto assets in India. We need to also ensure that all crypto holders go through a KYC (Know your Customer) Process with the help of crypto exchanges so that there is traceability, and safety of users. There also needs to be an authority to which users can report their grievances or malpractices by crypto exchanges. Similarly on the other hand it should be made mandatory for crypto exchanges to report fraudulent and suspicious transactions to the authority. Financial Intelligence units need to be alert to prevent any crimes from happening using cryptocurrencies.
Treating Crypto as Assets will mean that there will also be a need for us to set Accounting Standards that apply intreating Crypto. In terms of Taxation as discussed earlier it should be treated as capital gains and additional disclosures for holders of crypto should be made mandatory. Safeguards need to be created in order to protect the interest of retail investors. Investors need to be educated and an awareness needs to created amongst the citizens regarding the best practices to be followed. Data Localization can also be a step in protecting the data of users from being used for illegal purposes.
Conclusion
Along with this India should promote innovative uses of Blockchain Technology in various other fields. Government should engage in dialogue with thinks tanks, consider reports and take into account concerns of Cryptocurrency exchanges to effectively implement and regulate Cryptocurrencies. Cryptocurrency and blockchain can certainly act as a catalyst in the development and can help us achieve our ambitious goal of a 5 trillion-dollar economy
