Now that India has pulled back from banning crypto, here’s how it plans to develop digital currency on its own terms
India has been one of the fastest-growing markets for cryptocurrency trading, even though the ability to trade Bitcoin and its peers freely and anonymously undermines the country’s limits on the convertibility of its currency, the rupee. The central bank has been pushing for an official digital currency while voicing its concerns over the private crypto market. In February, the government decided to formally recognize crypto trading, while also discouraging it by imposing a stiff levy on transactions.
1. What did it do?
The decision to tax income from the transfer of virtual assets at 30% effectively greenlights crypto trades, while making them prohibitively expensive. Finance Secretary T. V. Somanathan said the government will treat crypto assets like earnings from gambling and speculation. How the new rules will work in practice isn’t clear, given the large volume of crypto trading that takes place beyond the view of financial authorities. The new tax may encourage crypto traders to switch to platforms in other countries, said Darshan Bathija, co-founder and chief executive officer of Vauld, a crypto service based in Singapore. That could be welcomed by India’s central bank: the government also announced that the Reserve Bank of India will launch its own digital currency in the year starting April 1.
2. How big is crypto in India?
It’s one of the biggest in the region and expanding rapidly. An October report from Chainalysis, a crypto-analysis firm, found the Indian market grew 641% over the period from July 2020 through June 2021. As a whole, central and southern Asia was the fourth-largest crypto market studied, with more than $572.5 billion in value received during that period, or 14% of global transaction value. Transfers worth more than $10 million represented 42% of transactions sent from India-based addresses during that period, versus 28% for Pakistan and 29% for Vietnam. That suggested a more mature Indian market. At the same time India — with a relatively young and tech-savvy population — was second only to Vietnam in growth of crypto adoption by retail investors in the region.
3. What are the central bank’s concerns?
The Reserve Bank of India has said cryptocurrencies pose serious threats to the nation’s macroeconomic and financial stability. India’s rupee is only partially convertible, which gives the regulator insight and control over who can access the country’s markets. Cryptocurrencies by nature are designed to be freely traded and anonymous, denying authorities both oversight and the ability to tax transactions. Issues such as money laundering and terrorism financing have been raised as well.
4. How’s it been until now?
India has had a hot-and-cold relationship with digital currencies, which existed in a grey area. In 2018, it effectively banned crypto transactions, but the Supreme Court struck down the restriction in March 2020. Calls for stricter rules have grown since then amid concerns that an unregulated environment could draw more domestic household savings toward the volatile assets — leaving savers vulnerable to a crash. News that the government was preparing a bill appeared to spark a Nov. 24 sell-off on exchanges popular with Indian investors.
5. What’s next?
Cash-dependent countries, most notably China, are pushing forward with digital versions of their currencies as they look to harness new technologies to make transactions more efficient. India’s finance minister said the launch of a digital rupee will usher in cheaper, more efficient currency management. The government still has to introduce a bill defining digital assets and how it wants to regulate the market. It will “consult widely” and look at global regulations before framing the final rules, Finance Secretary Somanathan said on Feb. 2.
6. How far ahead is China?
China has begun trials of its central bank digital currency in several cities, and plans to roll out its digital yuan for use by athletes and spectators at the Beijing Winter Olympics. The U.S. Federal Reserve and Bank of England are also looking into possibilities for their economies.
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