Divya Prakash

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The Future Money is Digital Money

Bill Gates

Digital money or digital currency refers to any means of payment that exists in a purely electronic form. Cryptocurrency is a type of digital or virtual money that runs on a decentralised network and uses encryption for protection. It has gained popularity in recent years as transactions can be made quickly and securely without any intermediaries like banks. Bitcoin is the most well-known cryptocurrency; however, various others are available today. Over the past years, the use of cryptocurrency has been on the rise in India. This popularity was initiated in 2017 when Bitcoin values reached an all-time high. Since then, the number of cryptocurrency exchanges and trading platforms has exploded nationwide. The COVID-19 pandemic was a major contributor to the expansion of cryptocurrencies in India, as it was widely used amidst the  economic turmoil. 

Despite being widely used, there is legal ambiguity regarding cryptocurrency in India. The legality of cryptocurrency has been a debatable topic, and Indian policymakers have adopted a cautious stance towards it.

Regulatory measures taken by the Indian authorities

The Indian government has taken a cautious and visionary approach towards regulating virtual currencies. A quick chronological overview of the regulatory actions taken by Indian authorities is as follows:

• In 2013, The Reserve Bank of India (RBI) warned the public about the dangers of using virtual currencies.
• In 2017, an inter-ministerial committee was formed by the government to investigate the problems surrounding virtual currencies and provide a regulatory framework. 
• In 2018, the RBI published a circular forbidding banks and financial institutions from conducting business with cryptocurrency exchanges and traders. The RBI justified the prohibition by citing worries about money laundering, terrorism financing, and other unlawful activities.  
• In 2020, the circular was overturned by the Supreme Court of India, which ruled that it was unconstitutional and that the RBI couldn’t prove that the ban was necessary. Upholding the judgement pronounced by the apex court, the government effectively lifted the restriction on cryptocurrency trading and opened doors for the development of the sector.
• In 2021, the government introduced a measure that aimed to outlaw all private cryptocurrencies and provide the groundwork for the digital rupee, the nation’s official digital currency.
• In 2022, The Reserve Bank of India (RBI) launched the first pilot of the Digital rupee-retail segment (e₹-R) under the scheme of Central Bank Digital Currency (CBDC).

Impact of the measures 

The government’s concerns about the hazards associated with cryptocurrencies, including money laundering, terrorism financing, and consumer protection, are reflected in these regulatory measures. However, the government is taking steps to regulate cryptocurrency because it understands its potential. Such as

1. RBI has issued statements warning the public about the risks associated with cryptocurrency, and banks continue to exercise caution in their dealings with cryptocurrency exchanges.
2. The bill that establishes a framework for a digital rupee, i.e., the Central Bank Digital Currency Bill (CBDC), was passed, and the first digital rupee was launched by RBI.

Further, the actions taken in regard to cryptocurrency over the years reflect that a clear regulatory framework to control the use and trade of cryptocurrencies hasn’t been established. Consequently, the market (use and trade) is governed by ambiguous laws. The absence of specific regulations has created an uncertain legal environment for businesses and investors, so they are facing difficulties in entering the sector due to the unpredictability. Thus, in India, the legal status of cryptocurrencies is still developing and unclear.

Taxation of cryptocurrency transactions and investments

In India, cryptocurrency transactions and investments are subject to taxation under the Income Tax Act of 1961. Some key points regarding the same are enumerated below:

• All transactions involving cryptocurrencies, including purchasing, selling, exchanging, and mining, are regarded as taxable events.
• The gains or losses from cryptocurrency transactions are liable to capital gains tax in India, where the income tax department has classed cryptocurrency transactions as a capital asset.
• Long-term and short-term capital gains are taxed at different rates. If a cryptocurrency is kept for more than 36 months, long-term capital gains are taxed at a lower rate than short-term capital gains, which are taxed at a higher rate.
•  If an investment’s value exceeds a certain limit, wealth tax may also apply to holdings of digital currencies as well as any gains or losses from their sales.
• Those using cryptocurrency for personal or professional purposes are obligated to keep track of all transactions and include them in their tax returns.
• The income generated from the sale of cryptocurrencies, that is, Virtual Digital Assets (VDAs), and Non-Fungible Tokens (NFTs) in the financial year 2022–23 will be subjected to a 30% tax rate, along with applicable surcharge and cess as introduced in the budget session. Additoinally, it’s vital to keep in mind that while calculating such income, only the cost of acquisition is deducted.

The legal status of cryptocurrency in India poses both challenges and opportunities for the industry. Some of these are mentioned below:

Challenges:

• Lack of regulatory clarity

Indian businesses and investors engaging in the cryptocurrency sector are experiencing anxiety due to the country’s unclear regulations. The lack of a defined legal framework makes it challenging for businesses to abide by rules and regulations and for investors to comprehend the advantages and disadvantages of investing in cryptocurrencies.

• Government bans and restrictions:

The Indian government has adopted a strong attitude toward cryptocurrencies, with the RBI circular prohibiting banks from dealing with them and the planned bill to outlaw all private cryptocurrencies. Due to these steps, it is now impossible for cryptocurrency exchanges to function in India, and the regulatory climate has become complex.

• Limited adoption

Despite the rise in popularity of cryptocurrencies in India, there is still a large population that relies on conventional banking and payment methods. This restricts the nation’s cryptocurrency industry’s ability to develop and thrive.

Opportunities:

• Financial inclusion

By giving unbanked individuals access to financial services, cryptocurrencies may aid in the promotion of financial inclusion in India. Cryptocurrencies may also contribute to a decrease in the amount of cash used in the economy, increasing financial openness and lowering the likelihood of corruption.

• Innovation

The cryptocurrency sector is quite innovative, with new business models and technology appearing frequently. India has a sizable pool of talented engineers and business people who might help the industry flourish, opening up new prospects for companies and investors.

• Economic expansion

By fostering the development of cutting-edge technology, attracting investment, and generating new jobs, the cryptocurrency sector has the ability to propel India’s economy forward. As the sector develops, it might play a significant role in the nation’s economy, opening up new possibilities for growth and development.

Conclusion

India’s legal framework for digital money has been a complicated and changing matter. The use and exchange of cryptocurrencies in India are currently not subject to a clear legal framework. For instance, the new tax regulations introduced are unclear despite the vital role of taxation in the growth of cryptocurrencies or the government’s proposed legislation to outlaw all private cryptocurrencies and create a foundation for the digital rupee. The proposal will compel them to close their doors or relocate their activities abroad and could be unsettling for investors and the sector as a whole. However, the government has launched their digital rupee through RBI, but they haven’t banned private cryptocurrencies. Thus, severely affecting the involvement of investors and businesses, hampering the growth of the market. Despite attempts made by the government to control the market.

As the regulatory landscape for cryptocurrencies in India continues to evolve, it will be important for individuals and businesses operating in the industry to stay informed of the latest developments and to ensure compliance with applicable laws and regulations.

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