Cryptocurrencies are decentralised digital assets that use cryptography and distributed-ledger (blockchain) technology to enable peer-to-peer value transfer without a central issuer. The combined market capitalisation of cryptocurrencies is now reported at USD 2.41 trillion.
Opportunities posed by cryptocurrencies:
- Financial inclusion: Reduce remittance costs and time aiding underserved populations in places with weak banking infrastructure.
- Innovation in financial services (DeFi): Smart contracts enable decentralised lending, automated markets and tokenised assets expanding credit access and new business models
- Settlement system efficiency: Blockchain can lower settlement time and reconciliation costs.
- Capital mobilisation: Tokenisation/NFTs provide novel models for crowdfunding, fractional ownership and digital provenance for art, real estate and intellectual property.
- Governance use cases: Block chain technology can be used in land-records, supply-chain traceability, identity and secure health records.
Challenges and risks:
- Price volatility: Due to extreme price swings retail investors may face high risk of losses.
- Illicit finance: Pseudonymous transfers have been used for money-laundering, sanctions evasion and ransomware payments.
- Systemic risks: Large scale adoption could weaken monetary transmission of RBI.
- Cybersecurity risks: Hacks of exchanges/wallets (e.g., historic Mt. Gox) and smart contract exploits result in large losses and contagion in crypto markets.
- Environmental costs: For example, Bitcoin mining has at times consumed electricity comparable to small countries, raising climate implications.
India’s approach:
- Taxation: A 30% tax (budget 2022–23) on income from transfer of virtual digital assets — signalling tax recognition but also a deterrent to speculative trading.
- RBI & CBDC: Reserve Bank of India piloted a retail CBDC (digital rupee), reflecting preference for sovereign, regulated digital money.
Strengths:
- Revenue clarity: The 30% tax ensures revenue clarity and reduces tax arbitrage.
- Monetary sovereignty: CBDC allows exploring benefits of digital currency under central control, addressing risks of private money.
- Gaps in India’s approach:
- Regulatory ambiguity: There is still an absence of a comprehensive, clear statutory framework.
- Taxation issues: A flat 30% rate with no offset for losses can discourage legitimate innovation.
- Insufficient consumer protection: There is no unified licensing or insolvency framework for crypto service providers.
- Fragmented responsibilities: Overlapping mandates across RBI, SEBI, MCA, and FIU-IND.
Way forward:
- Licensing & supervision for exchanges, custodians and market-makers with AML/KYC, cyber-security, capital and audit norms.
- Rework tax regime to allow setoffs and align with investor protection (avoid punitive flat rates that deter legit activity).
- Regulatory sandboxes for blockchain/DeFi with time-bound experiments and consumer safeguards.
Conclusion:
A pragmatic mix of clear rules, licensing, taxation reform, sanctioned experimentation (sandboxes) and international cooperation is essential for India to harness benefits while containing harms.
‘+1’ Value-Addition:
- El Salvador case study: El Salvador’s 2021 experiment adopting Bitcoin as legal tender highlighted risks such as volatility and low uptake.
Cryptocurrency use cases:
- Filipino workers using crypto remittance platforms such as Coins.ph.
- Start-ups raising funds through Initial Coin Offerings (ICOs) / tokenised real estate
- Indian artists are selling NFT artworks on OpenSea / WazirX NFT
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