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The Editorial Analysis: After the Budget’s ‘crypto signal’, India awaits reforms

 

Cryptocurrency in India: Relevance

  • GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

 

Crytocurrency in India: Context

  • Budget 2022 announced a 30% flat tax rate levied on any gains made from the transfer of virtual assets including cryptocurrencies and Non-Fungible Tokens (NFTs).
  • This announcement now leads to the assumption that crypto is legal in India.

 

What is cryptocurrency?

  • Cryptocurrency (crypto) consists of a digital denomination designed to work as a medium of exchange through a distributed computer network (a blockchain) that is not reliant on any central authority such as a government or a bank for its upholding and maintenance.

 

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30% tax on crypto: Significance of the decision

  • The decision affirmed the fact that cryptocurrency and related technologies could play in India’s financial-cum-economic system.
  • 30% tax is a premium and price well-worth paying in exchange for what is effectively a ruling-out of prospects for a total ban on crypto.
  • This decision could open up more doors for technologically savvy and innovation-minded investors.
  • Such transformations would involve DeFi (Decentralised Finance) activities such as staking, lending, and providing liquidity, among others.
  • The adoption of crypto currencies and virtual assets would enable quicker and cheaper transactions compared to banks and new forms of wealth creation without centralised intermediaries

 

About Decentralized finance (DeFi)

  • DeFi (or “decentralized finance”) is “an umbrella term for financial services on public blockchains.
  • DeFi allows most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it is faster and does not require paperwork or a third party.
  • As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, and not routed through a centralised system), pseudonymous, and open to all.

 

IMF Crypto Report

 

30% tax on cryptocurrency: Concerns

  • Small and Medium-sized Enterprises (SMEs): The community of SMEs and lower-end high net-worth individuals is going to find it most difficult to access the ecosystem given the substantial barriers posed by the tax rates.
  • Lack of clarity: CBDC, or Central Bank Digital Currency defeats the fundamental purpose of cryptocurrency, which is decentralisation.
    • Though a Cryptocurrency Bill is yet to be passed, there appears to be a push to treat crypto as purely an asset class than a currency.

 

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Cryptocurrency in India: Reforms needed

  • Reduce tax rates in future: However, it must be weighed against considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency.
  • Introduce more rigorous regulations, without which crypto has the potential to become a source of illegitimate political funding or black money.
  • Insights from international communities: International communities should be involved for their insights and advice on the best practices associated with cryptocurrency policy making.

 

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