India needs a regulatory framework for cryptocurrencies
Indian investors must be looking for a clear policy stance on cryptocurrencies in the forthcoming Budget. Even though daily cryptocurrency trades worth Rs 35-40 crore are rupee-denominated, there is no clarity on the tax treatment; indeed, there have been threats of legislative action to ban these instruments. Since January 2020, bitcoin has gone up by over 300 per cent, while ethereum is up 650 per cent. The CC130 Index, which tracks the 30 most popular cryptocurrencies, is up 200 per cent. Despite the high face values, it is easy to trade small units. Bitcoin can be broken into a hundred million “Satoshis” (named after the creator). Trades on exchanges with a high Indian presence start at minimum values of about Rs 150.
Many governments, financial institutions, and investment banks have started treating cryptos as mainstream assets. The US Financial Crimes Enforcement Network (FinCEN) has issued a draft of proposed regulation, while countries such as Japan, Australia, South Korea, Estonia, and Finland have legislation governing cryptos, and China is considering issuing a fiat cryptocurrency. The S&P Global is also due to launch a cryptocurrency index, tracking over 550 different cryptocurrencies. This makes it likely that hedge fund exposures to cryptos will surge. Several global investment majors are also offering managed crypto-investment services, creating portfolios for high-net worth clients. Apart from speculative bets on price, cryptos offer big savings in cross-currency trades. The brokerage costs of buying bitcoin in US dollars, and selling it in rupees via two trades, is an order of magnitude less than banking transaction costs in direct remittances of dollars. Of course, the crypto trader must accept the risk of inherent volatility.
The arbitrage opportunities could disrupt the global remittance market. For example, a large consortium led by Facebook intends launching a crypto, provisionally named “Diem”, to grab market share in remittances. Remittances into India amounted to about $80 billion in 2019 and anecdotal evidence suggests some NRIs are already using the crypto route to transfer funds. Given all these developments, it would be remiss of the Indian authorities to just continue ignoring cryptocurrencies or, worse still, ban them. Bans would be unenforceable anyhow, since it is easy to remit money abroad and continue trading cryptos through an US brokerage, for instance.
The Reserve Bank of India’s (RBI’s) notification in April 2018 denying banking services to the crypto-trading industry was struck down as illegal by the Supreme Court in March 2020. Since March last year, rupee-denominated trading volumes have exploded; banks are now offering services to crypto exchanges and it is legal to transfer rupees in and out of crypto wallets. There are many Indian traders and the community is growing. Crypto trades may also impact the huge remittance market and some of the fallout would be good. These assets may make it easier to bypass currency controls. As of now, Indian crypto traders live with the anxiety of unpredictable regulatory change, including taxation — the calculation of long-term capital gains, versus short-term capital gains, and the possible offsetting of trading losses. The government, the Securities and Exchange Board of India, and the RBI do need to consider all these aspects and take a measured decision on policy regarding these instruments.