In News
- Recently, the Securities and Exchange Board of India (SEBI) has given recommendations on cryptocurrencies regulations in India.
Concerns raised by SEBI:
- Consumer protection and enforcement of any regulatory regime over crypto assets would be challenging due to the decentralised nature of digital instruments.
- There is a great likelihood of execution of unauthorised trades not in consonance with any regulatory framework.
- Clarity needs to be brought on whether cryptocurrencies can be legally defined as securities.
Recommendations by SEBI:
- Investigating authority:
- Crypto assets related to unregulated activities may be entrusted to an investigating authority appointed by the government and take further legal action.
- Tokenised versions:
- If crypto assets are not banned, then there is a need for feature-based characterisation of the tokenised version of the assets, which may attract the supervision of different sectoral regulators
- Legislative framework:
- The legislative framework, if proposed, would need to delineate the role for different regulators and authorities including for regulation purposes, it recommended.
- Crypto Regulators:
- Different regulators currently regulate various entities based on the services and products they offer.
- There could also be a crypto asset referencing goods or services offered by entities, which are not regulated by any sectoral regulator.
- Consumers availing of such products should be protected through the Consumer Protection Act.
- Regulations by FEMA:
- It also suggested possible regulation of crypto trading platforms by the RBI under the Foreign Exchange Management Act (FEMA) as crypto assets are available for trading in a foreign jurisdiction as well and consumers abroad can remit funds to India using such currency.
What is a Cryptocurrency?
Blockchain technology:
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Features of Cryptocurrency
- Anonymous:
- Cryptocurrencies make it possible to lend, sell, buy, or borrow without an identity, credit score, or even a bank.
- Highly secure:
- All records of its creation and when it’s sent or received are stored in a sort of big digital book that anyone can access, keeping it honest.
- It can’t (easily) be stolen or seized and can be used anywhere in the world.
- Cheaper to transfer:
- Some coins are used to transfer value (measured in a currency like dollars) cheaper and faster than using credit or conventional means.
- Meaning the cost to send someone crypto, which can be converted into regular currency, is cheaper than something like a check or wire transfer.
- Illegal and highly volatile:
- However crypto is NOT just used for illegal purposes. In fact, due chiefly to its price fluctuation and other reasons it has fallen out of favor on the black market.
- No physical form:
- Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority.
- However, it can be and many governments are working to create a crypto coin version of its respective fiat currency.
- Decentralised:
- Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency.
- When created with decentralized control, each cryptocurrency works through what is called distributed ledger technology, which is typically a blockchain, that serves as a public financial transaction database.
Challenges
- Security Risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking).
- They are prone to issues like Hijacking, Routing Attacks, Distributed Denial of Service (DDoS) attacks.
- Shield to Crime: Used for illicit trading, criminal activities and organised crimes.
- Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
- Price Volatility: Prone to price fluctuations and waste of computing power.
- Threat to the Indian rupee: If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand of the latter will fall.
Position of the Indian government on Cryptocurrency
- Definition for crypto assets:
- The government in the Union Budget for 2022-23 has for the first time provided definition for crypto-assets and set out a list of proposals on the taxation of this new asset class.
- Coverage:
- The tax proposal covered all emerging digital assets, including non-fungible tokens (NFTs), assets in the metaverse, digital currencies and tokens, among others.
- Tax deducted at source:
- The Budget also said a 1% TDS (tax deducted at source) will be applicable on payments made on the transfer of digital assets.
- Loss from the transfer of virtual digital assets
- It will not be allowed to be set off against the income arising from the transfer of another VDA in the proposed amendments.
- 30 percent tax on income:
- The government will define virtual digital assets with a view to levying a 30 percent tax on income from all transfers of such assets.
- Infrastructure cost:
- Incurred in the mining of virtual digital assets including cryptocurrencies will not be allowed as a deduction by the taxman.
- Penalty:
- Deduction of surcharge and cess, which has been claimed and allowed to the taxpayer, will be deemed to be under-reported income and will attract a 50 percent penalty.
- They can voluntarily declare such classification and avoid the penalty.
Way Forward
- Cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology.
- Some of the cryptocurrencies have also seen a massive dip in their per-unit trading prices lately, leading to erosion of investor wealth.
- Establishing safeguards, measures and regulations after taking inspirations from developed countries would be the better way ahead.
Source: TH
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