India needs to create an atmosphere of innovation where new technologies like blockchain can prosper.
“We are delighted to report a breakthrough on the INR withdrawal issue. Starting 5pm today, INR withdrawals will be live for the next 48 hours. Settlements should reach your bank account within three bank business days of initiating the withdrawal from your Koinex wallet,” reads a message posted on Monday (8 January) on the Medium blog of Koinex, one of the biggest cryptocurrency exchanges in India. Koinex and other similar exchanges have been facing an unofficial squeeze from the banks, which suddenly stopped processing transactions to, and from, their accounts bringing all cryptocurrency trading to a halt without any prior warning. As a result, crores of public money got stuck on these trading platforms.
Even Koinex, which has resumed withdrawals from its wallet, has only provided a short window of 48 hours. No one knows what’s happening behind the scenes – what these exchanges are being told by the government or the banks. If this report from Mint is to be believed, the Reserve Bank Of India (RBI) was behind the coordinated moves and it “instructed the Indian Banks’ Association (IBA) to convey the changes to be made to the banks”. However, IBA chief executive officer has denied any knowledge of such instruction from the central bank.
Cryptocurrency exchanges have started proliferating very recently – their growth closely following the rocketing prices of Bitcoin. Earlier, Indians took to international exchanges to buy and trade in cryptos through credit cards but were soon warned by their banks that their transactions might be in violation of Foreign Exchange Management Act (FEMA). However, strictly speaking, there is little legal ground for the government to slap such charges when it has not even defined what Bitcoin is – currency, commodity, or a simple product available for sale online. And cryptocurrencies other than Bitcoin referred to as altcoins – there are hundreds of them – are not all similar. Most of them are decentralised and are based on the principle of blockchain. But there are others like IOTA, which are centralised. Coins are both minable and fixed in quantity from the launch. So, the market is already very complex and dynamic. It will not be easy for the regulators.
The government has set up a committee under the chairmanship of secretary, department of economic affairs (DEA). Finance Minister Arun Jaitley told the Parliament during the winter session that the committee “is deliberating over all issues related to cryptocurrencies to propose specific actions to be taken”. RBI has been sounding alarm bells for quite some time now, periodically issuing press releases warning investors about the risks associated with investing in cryptocurrencies. However, it didn’t specifically ban it. Nor did the government until now, but a release from the Finance Ministry on 29 December went as far as to call cryptos similar to “ponzi schemes”. Since that day, exchanges and investors are facing a difficult time.
It’s not just India that is struggling to come to terms with this completely new phenomenon. Many countries are trying to deal with cryptos in their own way. The United States Commodity Futures Trading Commission has classified it as commodity but Securities and Exchange Commission hasn’t approved any assets related to cryptocurrencies for listing or trading. The country’s Internal Revenue Service is classifying it as property and citizens will have to pay capital gains tax on them. The US cryptocurrency exchanges are also exhorting their investors to pay their taxes. IRS also bats for cryptos to be designated as currency whenever it is used for payment purposes. Since the US is a federation, states enjoy vast freedom and many are taking to blockchain and bitcoin passing laws facilitating their use.
Surprisingly, Russia under its President Vladimir Putin has taken liberal view of virtual currencies. He met with the founder of Ethereum in June last year and discussed how the blockchain-based smart contracts can be leveraged in Russia. Russia’s Prime Minister has also called for advocated research in virtual currencies. According to CoinDesk reports, Russia’s central bank is working on framing a new law around bitcoin and other virtual currencies and the Bank of Russia might be in the process of developing a national cryptocurrency. Russia particularly seems interested in leveraging blockchain technology in the financial sector. CoinDesk reports that President Putin has "ordered the creation of a regulatory ‘sandbox’ for companies that use technologies like blockchain to develop new products and services”.
In the United Kingdom, exchanges are not being regulated under money-laundering laws. At least not yet. But any proceeds from the sale of virtual currencies will be taxed and citizens will have to pay goods and services tax (GST). The warnings have also been issued by the Financial Conduct Authority to investors regarding risks involved in investing in these currencies. The country may see stricter regulations going forward.
In Germany, virtual currencies have been declared as financial instruments and a form of private money. But citizens engaging in this market will have to pay taxes. However, the country’s Federal Financial Authority has warned investors about ICOs. In fact, most of the countries seem very concerned about ICOs. Even those which are taking liberal view of these currencies are highly suspicious of the so-called coin offerings.
While many European countries are framing their own laws, it seems that the European Union might regulate virtual currencies under anti-money laundering and anti-terrorist financing rules. It even stonewalled attempts by its member country Estonia from launching its national cryptocurrency. It is unlikely that any other member would now try to attempt anything of the sort.
Australia is also in the middle of regulating cryptocurrencies under anti-money laundering and counter-terrorism rules. However, citizens won’t be taxed under GST but will have to pay taxes under income and capital gains tax rules. In an act backing the distributed ledger technology that is behind cryptos like Ethereum, Australia issued guidelines on its use in financial sector. Canada has also adopted very liberal approach to virtual currencies but it is also looking out to ensure there are no money-laundering rules broken.
East of India, there is less tolerance for virtual currencies compared to the Western world.
China recently came down heavily on cryptos. It has banned all financial institutions and third-party payment providers from accepting, using, or selling cryptocurrencies. The country’s three biggest exchanges lost most of their business now that investors cannot buy or trade currencies in exchange for yuan. Most of them are still operating through their branches in Hong Kong and elsewhere. In China, they are purely transforming cryptocurrency to cryptocurrency trading platforms. However, how long it will last is not clear. Bitcoin mining is very laborious process and it requires huge amount of power to mine one bitcoin. Since power in China is relatively cheap compared to developed world, mining was hugely lucrative business and a majority of miners were located in China but it is proving to be a huge burden for the country due to excessive power needs. So, China is now trying to limit power to servers engaged in mining and trying to squeeze miners out of the country in an indirect manner.
South Korea was until recently one of the biggest cryptocurrency markets in the world. However, Seoul now appears in a hurry to crack down on the whole business after millions of dollars worth cryptocoins were stolen from one of its exchanges which was hacked, and it had to file for bankruptcy. The country has banned trading in Bitcoin futures, and is also trying to curb speculative nature of the trade. More regulations are on the way towards that effect. South Korea's top financial regulator recently revealed that the government will engage with regulators in China and Japan in curbing speculative transactions of cryptocurrencies. The country is also looking at some of the country’s big banks that tied up with the exchanges to make sure no existing laws were violated.
Amidst all this crackdown in the east, Japan is an exception. It is way ahead of even some of Western nations in regulating virtual currencies. It enacted a law last year and distributed licences to exchanges to operate in a legal manner. But like others, it is also wary of potential misuse and hence has brought these exchanges under anti-money laundering rules. Legally speaking, the virtual currencies are no different from any other currency currently in use in Japan.
Singapore is another exception. It doesn’t regulate virtual currencies and do not have any immediate plans to do so. Deputy Prime Minister Tharman Shanmugaratnam has clarified that the country has no intention of regulating crytpos but Monetary Authority of Singapore (MAS) is monitoring activities surrounding cryptocurrencies to check for illicit financing purposes, money laundering, financing of terrorism, etc. However, there are indications that MAS will soon start regulating sale of digital tokens during initial coin offerings – crypto world’s IPOs.
So, how should India go ahead? One hopes that it will take a liberal approach to the issue of virtual currencies. Obviously, the regulators can come up with strict laws on exchanges to bring down speculativeness, any potential misuse like money-laundering, terror financing, etc, just like other countries are doing. There are broadly three areas the government can focus on as far as regulations are concerned: rules to regulate exchanges (extent of their role and responsibilities), coming up with a proper mechanism to track and regulate sales of digital tokens in ICOs, and finally tweaking and framing rules around taxing profits, proceeding from investment in virtual currencies. The government will have to start all this by defining what it considers cryptocurrencies as. Additionally, it needs to create an atmosphere of innovation and encouragement where new technologies like blockchain can prosper.
While many cryptocurrencies may be fraud, the technology underlying it is not. We need to punish the bad guys and reward the innovators.