Cryptocurrency: Legal, Taxation, & Financial Aspects In India

Cryptocurrency: Legal, Taxation, & Financial Aspects In India

A few months ago, SC reversed RBI’s ban on dealing in cryptocurrencies. Since then many startups are working to introduce decentralised finance (Defi) to provide financial & banking services using cryptocurrencies. With the crypto market of India growing rapidly, the government has a Bill on its table that can ban and criminalize dealing in cryptocurrency. Amidst all the clutter, let’s look at the legal, taxation, and other features of cryptocurrency in India.

Crux of the Matter

Before we delve into the economic, legal, and taxation features of cryptocurrency in India, you can read some interesting stats on cryptocurrency here: Cryptocurrency In Numbers.

Why Is The Attraction Towars Cryptocurrency Increasing?
Vibhor Jain, the founder of Chained Ventures says that traditional banking and finance are facing stability issues. Moreover, the rate of return from these traditional sources has also significantly reduced. Hence, many are putting their money on the blockchain and earning an interest of 9-12% on crypto-deposit.

Is Cryptocurrency Legal In India Then?
Cryptocurrency is not illegal but it is also not considered a legal tender in India. There are no laws pertaining to cryptocurrency and currently, it is in a grey area.

Is Income From Cryptocurrency Taxable?
India’s Income Tax Act does not have any provision on the taxability of cryptocurrencies. Taxation on cryptocurrency depends on the regularity of transactions and treatment in books of accounts.

Since cryptocurrency does not fall within the definition of currency under the current statute definitions, the gains would be taxed either as income from business/profession or as capital gains.

Riaz Thingna Director, Grant Thornton Advisory

The Feature Of Anonymity

  • Personal identity i.e name, physical address, and email address is not linked to bitcoin transactions.
  • Public addresses are used for transactions.
  • Due to untraceability of crypto transactions, governments are not allowing a significant quantity of transactions to take place anonymously.
  • Governments fear it could be misused for funding illegal activities, terrorism, etc.

Experts’ Stand On The Matter
Kenneth Saul Rogoff, Chief Economist of IMF says governments are not allowing crypto because it would be difficult for governments to collect tax as tracing every transaction is difficult. He also says that once the allure of anonymity is removed, cryptocurrencies are good to use. Rogoff also says that it is wrong to say cryptos have no worth simply because they don’t have a backing. However, if the supply of crypto can be controlled then it will have value as a transaction medium.

Subhash Chandra Garg, Former Finance secretary says that since currency represents purchasing power, it must be issued in a well-calibrated way by the government or RBI. He also says if a private party starts issuing currency, the monetary policy goes for a toss. Garg says Facebook’s crypto Libra’s value will be maintained in terms of global currency, so FB will have to manage its value by buying more dollars at the market rate, making the process very costly. So eventually the issuing agency will make losses and cryptocurrency may not be reliable.

It must be noted that Garg is leading the Bill banning and criminalizing cryptocurrency in India.

Not accepting cryptocurrencies may damage local economies in the long run. Governments must realise that cryptos will not replace fiat currency. In fact both can coexist.

Changpeng Zhao, CEO Binance

Curiopedia
  • ‘Pi’ is the first digital currency that can be mined on our phones. The digital currency is developed by 2 Stanford PhDs and an MBA; and has gained over 8 million users in less than 2 years.
  • In 1996, the National Security Agency published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system, first publishing it in an MIT mailing list and later in 1997, in The American Law Review.
  • David Lee Chaum is a computer scientist and cryptographer. He is known as a pioneer in cryptography and privacy-preserving technologies and widely recognized as the inventor of digital cash. His 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups” is the first known proposal for a blockchain protocol.

Cryptocurrency Heists In 2019

Cryptocurrency Heists In 2019

In the previous piece, we looked at some interesting numbers around cryptocurrency from India and the world. Amidst growing popularity of cryptocurrency, cases of heists are also increasing, resulting in loss of millions of dollars across the globe. Let’s take a look at some of them.

Crux of the Matter

Heist in South Korea
Ethereum worth $49 million stolen from South Korea-based Upbit.
Cryptos worth $13 million lost from South Korea-based Bithumb.

Heist at Binance
Bitcoin worth $40 million lost from one of the world’s largest cryptocurrency exchange Binance.

Heist in Japan
Cryptos worth $30 million lost from Japan-based Bitpoint.

Heist in United Kingdom
Ripples worth $9.5 million lost from UK-based Gatehub.

Heist in Singapore
Cryptos worth $7 million hacked from Singapore’s DrangonEX.
Cryptos worth $5 million stolen from Singapore’s Bitrue.

Heist in Vietnam
Cryptos worth $500,000 were stolen from Vietnam based Vindax.

Heist in Italy
Cryptos worth $70,000 stolen from Italy-based Altbit.

Stay tuned to our channel to know more about the legal, economic, financial, social, and technical aspects of cryptocurrencies.

Curiopedia
  • ‘Pi’ is the first digital currency that can be mined on our phones. The digital currency is developed by 2 Stanford PhDs and an MBA; and has gained over 8 million users in less than 2 years.
  • In 1996, the National Security Agency published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system, first publishing it in an MIT mailing list and later in 1997, in The American Law Review.
  • David Lee Chaum is a computer scientist and cryptographer. He is known as a pioneer in cryptography and privacy-preserving technologies and widely recognized as the inventor of digital cash. His 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups” is the first known proposal for a blockchain protocol.

Cryptocurrency In Numbers

Cryptocurrency In Numbers

In March 2020, India’s Supreme Court overrode a two-year-old ban on dealing in cryptocurrency announced by the Reserve Bank of India. Even as cryptocurrencies are still in a grey area in terms of legality, its popularity in India has been growing. Let’s look at some interesting numbers around cryptocurrency from India and world.

Crux of the Matter

Global cryptocurrency market is on a rise, and India’s trade volumes have gone up multifold. The following infographics will give show interesting facts and numbers of the cryptocurrency market size in India and the world.

Cryptocurrency is gradually entering into the financial sector, with many getting high returns on lending cryptocurrencies like Bitcoin. Many financial services firms are using them as a hedging tool as well.

After taking a look at numbers around cryptocurrency, let’s take a look at the market share of different cryptocurrencies in the virtual market. Moreover, take a glimpse of the prices (in $) at which they were trading on 1st October, 2020.

Recent News In India
The Indian government is sitting on the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. Former Finance Secretary Subhash Chandra Garg is heading the draft. The bill proposes a complete ban on cryptocurrencies issued by private parties. It also proposes criminalizing dealing in cryptos with 10-years of imprisonment and a fine up to ₹25 crores.

Stay tuned to our channel to know more about the legal, economic, financial, social, and technical aspects of cryptocurrencies.

Curiopedia
  • ‘Pi’ is the first digital currency that can be mined on our phones. The digital currency is developed by 2 Stanford PhDs and an MBA; and has gained over 8 million users in less than 2 years.
  • In 1996, the National Security Agency published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system, first publishing it in an MIT mailing list and later in 1997, in The American Law Review.
  • David Lee Chaum is a computer scientist and cryptographer. He is known as a pioneer in cryptography and privacy-preserving technologies and widely recognized as the inventor of digital cash. His 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups” is the first known proposal for a blockchain protocol.

Cryptocurrency Gets Green Light In India

cryptocurrency bitcoin

Recent declaration by RBI cleared all confusions regarding legality of Cryptocurrency, as RBI announced that there is no prohibition on opening of bank accounts by Cryptocurrency traders.

Crux of the Matter

Recent Reversal
In March 2020, Supreme Court of India reversed RBI’s decision of 2018 of banning regulated financial intermediaries from using cryptocurrency. However, confusion lingered among potential investors. On the demand of a Right To Information (RTI) application, RBI announced that cryptocurrency traders can be allowed to open bank accounts.

While the Supreme Court ruling had made it very clear that there are no curbs on banking for crypto businesses, the RBI reply to RTI filing is very much welcome. There has been confusion amongst many banks despite the Supreme Court ruling because these banks have been waiting for information from RBI.

Nischal Shetty, CEO of WazirX

History Of Cryptocurrency In India

  • 2012-2013: Cryptocurrency comes in mainstream observation
  • 2013: RBI cautions of it and labels it “risky”
  • 2016: Exponential increase in its use after Demonetization
  • 2017: RBI repeats concerns of 2013, with the Finance Ministry expressing concern over safety and legality of transactions
  • 2018: RBI prohibits regulated financial institutions’ dealing with cryptocurrency
  • March 2020: SC legalizes Cryptocurrency, overturning RBI’s decision of 2018
  • May 2020: RBI Says “No Prohibition” on Banks allowing accounts to Cryptocurrency traders


Crypto Around The World

  • 2008: An anonymous paper by title “Bitcoin: A Peer-to-Peer Electronic Cash System” appeared
  • 2009: Bitcoin made available to public
  • 2011: Other cryptocurrencies appear – Namecoin, Litecoin, etc
  • 2013: Bitcoin prices crash after reaching 1 Bitcoin = $1,000
  • 2014: Bitcoin exchange Mt.Gox goes offline. Loss of $450 million
  • 2017: Japan passes law legalizing Bitcoin as payment method
  • 2020: India legalizes Cryptocurrency
Curiopedia
  • Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin’s original reference implementation. As part of the implementation, Nakamoto also devised the first blockchain database.
  • Libra is a permissioned blockchain digital currency proposed by the American social media company Facebook, Inc. The currency and network do not yet exist, and only a rudimentary experimental code has been released. The launch is planned to be later this year.
  • ZebPay is a cryptocurrency exchange and wallet provider headquartered in Singapore with a registered office in Australia. It is currently operational in over 163 countries, including India. In 2020, ZebPay was acquired by Rahul Pagidipati, who is currently serving as CEO, and relaunched in India with a new crypto-crypto trading feature.

Mastercard CEO withdraws from Facebook's Libra over Varied Concerns

Mastercard’s CEO Ajay Banga has pulled out from Facebook’s cryptocurrency Libra, over concerns about compliance, making money, and wallets. He reports that Libra’s leaders wouldn’t commit to observing laws, so he couldn’t see how the digital currency would make money. The social networking giant’s plan to store the coins in its Calibra digital wallets did not go well with him either.

Crux of the Matter

What is Libra ?
Libra is a global currency and financial infrastructure developed by Facebook
Built on a secure, scalable, and reliable blockchain, it is a stable coin which is backed by a reserve of assets. It is governed by the independent Libra Association and uses the LibraBFT consensus mechanism. Facebook aims to have 100 members in its Libra Association before the launch, which in on first half of 2020.

The crack in the partnership
Ajay described the lack of a clear business model as a cause for major concern, stating that he could not see the future of their vision to become profitable. The association’s members were not ready to commit to anti-money laundering or data management controls wither. Mastercard jumped ship from the project in October, along with PayPal and Visa, just as the official charter to establish the Libra Association, a nonprofit body overseeing the project, was signed in Geneva.

The red light on Libra
Libra has faced intense scrutiny in recent months as EU competition regulators continue to probe them. US lawmakers grilled Facebook’s CEO Mark Zuckerberg last year on subjects such as Facebook’s handling of financial data, its cooperation with regulators, and why it wants to develop a substitute for the dollar. The association had started with 28 founding members in June 2019, but over the months eight firms have left. Telecom major Vodafone was the latest to withdraw when it decided to focus on its own payment products. Facebook is yet to comment officially on these withdrawals.

Curiopedia

Blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. It is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.

By design, a blockchain is resistant to modification of the data. For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority. Although blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been claimed with a blockchain.

Blockchain was invented by a person (or group of people) using the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin. The identity of Satoshi Nakamoto is unknown. The invention of the blockchain for bitcoin made it the first digital currency to solve the double-spending problem without the need of a trusted authority or central server. The bitcoin design has inspired other applications, and blockchains that are readable by the public are widely used by cryptocurrencies. Blockchain is considered a type of payment rail. Private blockchains have been proposed for business use. Sources such as Computerworld called the marketing of such blockchains without a proper security model “snake oil”. More Info