Future of Cryptocurrency Exchanges in India – The Safest Bet

By Samraat Basu

The Industrial Revolution 4.0 has taken the world by storm and India has been at the forefront of developing the Web 3.0 space, blockchain technology and an emphasis on digital inclusion across all demographics. One of the major use cases of blockchain technology is the trading and use of cryptocurrencies and other cryptographic assets. Despite the huge headwinds faced by the cryptocurrency industry due to recession fears, a significant number of Indians are participating in the crypto ecosystem. However, in India, cryptocurrency is traded as an asset class and heavily taxed at 30% (plus additional surcharges and cess), which has led to dissuade Indian traders from using Indian trading platforms. In fact, Indian traders have resorted to foreign “crypto trading platforms” to avoid paying the high taxes as it has made cryptocurrency trading impractical. This has several negative consequences. First, this has a direct impact on the amount of tax revenue collected by the exchequer. Secondly, Indian fiat currencies that are converted into foreign currencies (for trading purposes) or cryptocurrencies are much more difficult to track and trace by the Government of India. Third, it is indirectly benefiting the economy of those countries that have relatively liberal tax policies for cryptocurrency trading. Fourthly, in case of fraud or any other bad situation, it can leave Indians using such foreign platforms without proper legal recourse.

The dangers of the current trend

One of the major geopolitical dangers of the cryptocurrency trade escaping to foreign shores is that it could end up in a potentially warlike state vis-à-vis India. Echoes of a similar situation where data of unsuspecting Indian users was being collected, monetized and tracked by Chinese platforms led to the ban of a number of applications like TikTok, PUBG, UC Browser, Cam Scanner etc. by the Government of India. While it could be argued whether the ban was excessive or whether there were potentially better alternatives to protect Indians’ data, as I have pointed out in this article published by the Oxford Law School; there is no doubt that the use of Chinese trading platforms can have negative consequences for thousands of Indians who trade in cryptocurrencies. China, unlike India, has unlimited control over the companies operating in their shores and there is a significant risk of misuse of Indian financial data stored with these companies which can lead to financial instability of thousands of Indians, who , in turn, resulting in fiscal and geopolitical consequences in India.

Given the decentralized nature of cryptocurrency and the global phenomenon it has become, there is little point in clamping down, limiting or disincentivising activity in this sector of the economy as it is easy to bypass such restrictions by using VPN services to access foreign cryptocurrency exchanges. In my opinion, as history has often shown us, the carrot usually works better than the stick. Furthermore, the slow demise of this industry will also have a negative impact on the thousands of jobs that have been created to support this industry.

Hope for the future

Policy makers must work to formulate clear and transparent laws free of legalese to regulate the broader digital and crypto-asset space. Instead of using a sledgehammer to kill a fly, it is far more prudent to engage with experts and design a nuanced regulatory framework that has an opt-out/evaluation clause making it mandatory to review developments in this space and update the law (especially in light of the speed dizzying momentum in which this sector is developing).

The upcoming G20 2023 summit, with India at the helm, is expected to follow up on the announcement by finance ministers to discuss our cryptocurrency policy with high-level leaders from other countries who have a shared vision in using the policy to advance research and development in new technologies.

Recently, US Treasury representatives visiting India had called for a joint effort to regulate the cryptocurrency space in order to reduce the cost of cross-border payments to ensure financial stability with the Financial Action Task Force (FATF). The FAFT is an intergovernmental political body whose purpose is to set international standards and develop and promote policies, both nationally and internationally, to combat money laundering and terrorist financing. A consistent cryptocurrency policy will also ensure that the dangers of terrorist financing through cryptocurrency are also addressed.

India has a large number of cryptocurrency trading platforms where traders invest in cryptocurrency as an asset class. Major exchange platforms like Bitbns, Coin DCX and WazirX have internal regulatory mechanisms where they ensure that traders upload relevant documents for KYC as required by Indian law. This subsequently ensures that traders, regardless of their trading volume, have traceable investments and are protected by law. Also, Indian stock exchanges have shown that they are compliant with existing regulations, unlike major foreign exchanges like FTX, which recently collapsed and filed for bankruptcy.

The Government of India should trust, support and facilitate legitimate and compliant Indian start-ups and enterprises, especially in the high-tech sector, as they can contribute significantly to the wider goals of job creation, economic growth and prevention of crime and terrorism.

The author is a legal expert

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