Regulations of cryptocurrency in India and other countries
What is a Cryptocurrency?
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. This means it works without a central authority, it’s called a decentralized platform.
As per CNN News,
“INDIA’s young investors will buy #Bitcoin, over gold and ‘boring’ stock”
Remember 8th Nov 2020 demonetization, but no news came up later about how many notes came back to the banks, a lot of countries’ currencies printed and on the circulation have a discrepancy, we don’t even know how many hands it has changed so blockchain concept plays an important role here of being transparent and making us aware of how many hands a currency note has changed. Cryptos are necessary to break the monopoly of certain governments which keep printing additional currency without any fundamental justification, where the currency in circulation and currency printed is unequal.
The Finance Minister has also announced the introduction of Central Bank Digital Currency (CBDC) by the Reserve Bank of India (“RBI”) using blockchain starting 2022–23.
Moving ahead let me throw some light on how countries are taking it across the world?
In most countries, the Central Banks are totally against cryptocurrency due to its decentralization. In some countries the government is making taxing it, making regulations.
Big corporates like Apple, Google, IBM, and other corporates are bullish on it and are adopting it. The Youth of all nations are adopting it from the Indian IITians, IIM students, CEOs, CFOs, and engineers are proactive when it comes to development in the industry be it smart contracts and other developments are highly active and they accept cryptocurrency and embrace the same. Most of the service providers in the cryptocurrency industry also take payments in cryptocurrency.
Where are they traded in which exchanges are they traded?
Yes, They aren’t traded in NSE, BSE, NASDAQ, or other exchanges, So where are they traded?
These are traded over Binance, WazirX, Coinbase, Coinex, etc, and a lot of other spaces are they are called exchanges. Are these regulated exchanges answer is no, not by any government authorities at least in India,
Take an example of other countries:
The first logical step for initiating a crypto regulatory framework is setting up a Regulatory Authority, Remarkably few countries have done so and few of them are,
- Dubai has VARA Virtual Asset Regulatory Authority, Dubai’s Virtual Asset Regulatory Authority will classify the types of virtual assets and set controls to monitor the digital assets sector. VARA will also play a role in punishing the violators of the new laws with its authority of imposing fines and suspending businesses.
2. Singapore has MAS, The Monetary Authority of Singapore (MAS) has implemented legislation to regulate the cryptocurrency industry.
3. Bermuda has BMA, Bermuda Monetary Authority is the sole regulator of Bermuda’s financial services sector.
4. Australia has ASIC. Australian Securities and Investments Commission (ASIC) is Australia’s corporate, market, and financial services regulator.
The organization contributes to Australia’s economic reputation and wellbeing by ensuring that Australia’s financial markets are fair and transparent, supported by confident and informed investors and consumers.
5. United Kingdom has FCA, the Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry.
So, In India, are they regulated by SEBI or RBI?
Cryptocurrencies are neither commodities nor stocks, also it’s not even a Legal tender/ Currency as per RBI.
Let’s check out FEMA, the Foreign Exchange Management (Exports of Goods & Services) Regulations, 2015,
Indian currency and foreign currency (as defined under FEMA) have been excluded from the scope of VDA. Currency has been defined under section 2(h) of FEMA as,
“Currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, traveler’s cheques, letters of credit, bills of exchange and promissory notes, credit cards, or such other similar instruments, as may be notified by the Reserve Bank”.
The definition of currency is an inclusive one and it is unclear whether crypto assets are covered in such a definition.
While the policy intent is clear that a bright line is being drawn separating currency and VDA, in practice, there could be ambiguity concerning where the demarcation between currency ends and VDA begins. Further, with the proposed introduction of CBDC and developments where countries such as El Salvador have recognized Bitcoin as legal tender, it is possible the ambit of Indian and foreign currency may expand, excluding certain items from the scope of VDA.
CROSS- BORDER TRANSACTIONS AND CRYPTOCURRENCY
When the Cryptocurrency is being transacted outside India by Indian Residents as a mode of payment of services rendered and goods sold by a non-resident, such transaction is most certainly to be classified as an export of goods under the Foreign Exchange Management (Export of Goods and Services) Regulations 2015, and the Master Directions on Export of Goods and Services. These regulations require the full value of any exports to be received through authorized banking channels only and any set-off import payments to be received only through a process facilitated through a bank. This leads to a situation where a cross-border barter would not be permitted. Therefore, a cross-border transfer by Indian residents involving cryptocurrency without any fiat currency through an authorized banking channel violates Export Regulation.
Whether cryptocurrencies were legal or illegal?
They are taxed as per the current finance bill but are unclear, with no clarification if they are legal or illegal. As of now, in India, no law regulates or legalizes it. At the same time, no law prohibits it either. So, in the absence of any specific law or regulation, the decision of a person lies on the interpretation of the facts and circumstances of the case.
Most people understand taxation as a simple binary: That government can only tax what is legal; if it is illegal, they expect the government to punish it and force disgorgement of ill-gotten gains. Taxation works very differently. Unfortunately, investors only listen to self-proclaimed ‘gurus’ in the crypto echo chamber. Yes, often random influencer starts speaking of taxes in Crypto in Twitter spaces, who have no idea of taxation at all.
In a country with low financial literacy, the government must explain its stand clearly and unambiguously when it takes the first step towards taxing or regulating a new and confusing ‘financial asset’. The numbers are large enough to warrant clarity, especially when the government expects to collect taxes on income from the product. However, typical of how the finance functions, is unique it first delayed a decision on regulating cryptocurrency for too long, and, when it finally took a decision, it put taxation before legislation — a bit like putting the cart before the horse.
Which all laws will be hampered to check if crypto transactions have done any kind of violations?
Based on the present law, this would amount to a clear violation of the Foreign Exchange Management Act & Prevention of Money Laundering Act in India.
The RBI decided to impose a ban on all banks from providing services to crypto exchanges. this led to even greater confusion among those who were trading in cryptos.
Currently, even Coinbase, the biggest cryptocurrency exchange tried to establish itself in India, it is the biggest exchange in the USA, but it failed in India because bank support was withdrawn.
BTC the bitcoin was passed to be a legal tender, I was present in that meeting, this meeting was also hosted in Twitter space, where people could join the parliamentary meeting. Certainly a matter of pride. The law was passed by the Legislative Assembly on 9 June 2021, with a majority vote of 62 out of 84. El Salvador’s President Nayib Bukele was heading the chair when BTC was adopted as a legal tender, which is to say that one can pay taxes to the government in crypto. In times of economic crisis and sanctions, cryptos are gaining more adaptability and popularity.
Did you know that Wyoming is the first state in America to have legal Bitcoin Banking? Shortly there will be two Bitcoin-friendly banks in the State of Wyoming, that are overseen by the Wyoming Banking Commission and there are strict rules that they must follow to maintain their Banking License.
How do Indians form a crypto company?
are the Some popular countries which are crypto-friendly are the British Virgin
Islands, St. Vincent & the Grenadines, Curacao & Panama. Many have also selected Singapore as their destination primarily because cryptos are regulated and there is clarity in the legislation which regulates it. Companies prefer floating 2 entities at the time of creating their crypto — the first is the trust or a foundation that holds the cryptos and the second one is a marketing or distributing arm which conducts all activities and enters into contracts with others. This structure is preferred so that the founders can safeguard the crypto in case of any eventuality or an adverse regulatory condition.
Regarding the legality of cryptos, a major concern that looms is whether issuing any currency is a ‘sovereign right’ or whether any person or corporation can also enjoy this right. Countries have had the right to issue their currency, and regulate and monitor it. Also, currencies are issued by Central Banks and not by the governments in power at the time of their issuance. So essentially, there is the separation of control and power in fiat currencies. This maintains the value of a currency to a large extent. In cryptos, none of this is possible due to the inherent nature of blockchain technology. At the same time, some also argue that cryptos are necessary to break the monopoly of certain governments which keep printing additional currency without any fundamental justification.
Countries, where crypto is unregulated, are the British virgin islands, St. Vincent & the Grenadines, Costa Rica, Nevis, Dominica, Curacao & Panama.
The Reason for opening a company here is
- Political and economic stable state;
- Ease of incorporation, operation, and maintenance;
- A classic offshore jurisdiction;
- Tax-free regime;
- Minimum of one shareholder;
- No minimum paid-up share capital requirement;
- Confidentiality of the directors, shareholders, and beneficiaries’ details (not available to the public);
- Non-residents are allowed to register offshore companies in the BVI in any sphere of activity permitted by the legislation of the state;
- Offshore companies in the BVI can be established by non-residents or citizens of the country, and it is possible to re-register the company outside the borders of the islands;
- Nominee service is allowed;
- Asset protection.
Few also like countries like Singapore as their destination primarily because cryptos are regulated and there is clarity in the legislation which regulates it.
The most important trend is Companies try to create two entities at the time of creating their crypto — the first is the trust or a foundation that has taken economics and the other is in a different country that does the marketing or distributing arm which conducts all activities and enters into contracts with others. To get twin protection as a company with token economics if get hit by the ambit of tax authorities or an adverse regulatory condition other is still safe.
The finance bill has defined VDA, Let’s take a glance
1. Definition of VDA:
The Finance Bill provides an exhaustive but broad definition of VDA where the following criteria need to be met to qualify as a VDA (irrespective of the terminology or nomenclature):
- any information or code or number or token,
- generated through cryptographic means or otherwise,
- can be transferred, stored, or traded electronically;
Additional Criteria (one of which needs to be satisfied):
- providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or
- functions as a store of value or a unit of account (including its use in any financial transaction or investment, but not limited to investment scheme);
Exclusions: Indian currency or foreign currency as defined under Foreign Exchange Management Act, 1999 (“FEMA”)8 is excluded from the ambit of VDA meaning that anything that is Indian currency or foreign currency is automatically not a VDA.
To hammer it BTC is a legal tender in El Salvador which is a contradiction to law somehow the ambit of Indian and foreign currency may expand, excluding certain items from the scope of VDA.
What is NFT?
NFT is included in the Definition of VDA.
An NFT is a digital asset that symbolizes physical objects such as art, music, video, in-game assets, and so on. It is primarily purchased and sold online using cryptocurrency. It’s often encoded using the same underlying software as many other cryptos — blockchain. NFTs are tracked on blockchain to offer evidence of ownership to the buyer. When an NFT is sold, the creator receives payment in the form of cryptocurrency.
Do you know?
Amitabh Bachchan’s NFT collection sold for Rs 7.18 crore
If Amitabh Bachchan’s NFT sale was taxed at 18% GST despite NFTs being categorized as cryptocurrency in the Indian Budget 2022, which means it was deemed to be a capital asset, and hence income taxed at 30%
Are we then looking at 48% tax for NFTs in India with no deduction, setoff, or carry forward?
- Income earned from the transfer of such virtual digital assets will be taxed at a flat 30%.
Eg Firstly, all crypto profits gained over the year will be taxed at the rate of 30%. So for example, a person who buys a crypto asset at $10,000 and sells it at $12,000 would show a profit of ₹ 2,000 and pay 30% tax, which is $600.
What if it buys BTC and sells at a profit of $600 and it has losses of $700 while selling ETH?
No set-off of losses is possible, pay $600 and book losses of $700!
2. No carry-forward & set off of losses arising from transactions is allowed from FY 2022–23.
3. Losses from one virtual digital asset cannot be set off against income from a different virtual digital asset.
4. 1% TDS will be deducted on all VDA transactions from July 1st, 2022
This means Gains from one crypto cannot be set off against the losses of another crypto. So profits arising from the crypto trade of the same currency can be set off against losses arising from the same crypto in another trade. Seems like a nightmare to people in the industry, Your profit has our share, and your losses are to be left at your suffering.
“Share your joys, while your grief is only yours”! we shall add more! is a clear indication from the government.